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A Bigger Payday From Your 401(k)

Rolling over after-tax cash to a Roth IRA can really pay off

Investing money for retirement


You may be able to roll over money from a 401(k) into a Roth IRA.

Creative savers are waking up to a new way of supersizing their IRAs.

It allows workers to salt away $30,000 or more a year of after-tax money into a traditional 401(k) savings plan, then roll that money immediately into a Roth IRA.

Get more savings tips in the AARP Money Newsletter

Once tucked into a Roth, any future earnings will be tax-free to you in retirement, and to your heirs if any money is left over.

Retirement planners are dubbing this the mega–backdoor Roth because it skirts the current annual Roth limits of $6,500 for those who are 50-plus. It's even sweeter for high earners, as they are generally excluded from contributing to Roths at all.

"It's like beating the limits," says Ed Slott, an IRA expert based in Rockville Centre, New York. "It's a big deal if you can do it."

Who can do it?

That's the hitch. Not everyone can. For starters, your employer must allow after-tax contributions. (About 40 percent of large company plans managed by Vanguard do, for example.) In addition, for you to make the most of this strategy, your employer must permit you to make withdrawals from your 401(k) so you can roll these after-tax dollars into a Roth each year while you're still employed. Once you've determined these options are available, read on to further pursue this money-blooming approach.


Workers can generally contribute up to $18,000 in pretax dollars into a 401(k) this year, plus an extra $6,000 if they are 50 or older. But many plans let you "top up" annual contributions with posttax dollars to as much as $59,000 if you are at least 50.

For instance, say your pretax contribution plus any employer match totals $25,000; that means you can still contribute up to $34,000 more annually in after-tax dollars to the account.

See also: No 401k? Consider an IRA

Roll over

Next, roll your after-tax contribution into a Roth IRA. This usually won't trigger a tax on the 401(k) withdrawal because the money likely won't have been in the account long enough to generate any earnings. Once in the Roth, gains will be tax-free. If, by chance, there are any gains before the rollover occurred, they will be taxed. Even that tax can be postponed, though, by rolling these earnings into a traditional IRA, where they won't be taxed until you withdraw them later, Slott says.

Seek assistance

Sound complicated? It is, and that's why it's best to consult a tax planner or accountant to help out, because mistakes can be costly. Also, the president's proposed budget seeks to curtail this strategy. But for those who follow all the rules, the payoff can be well worth it.