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These are the biggest mega backdoor Roth conversion mistakes

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Mega backdoor Roth conversions can significantly boost tax-free retirement savings — but this maneuver is not available for all investors and mistakes are common, experts say.

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When investors make too much to save directly to a Roth individual retirement account, backdoor strategies can bypass the IRS income limits. A mega backdoor Roth conversion involves after-tax 401(k) contributions, which are shifted to Roth accounts.  

It’s more generous than regular backdoor Roth conversions because after-tax contributions can exceed the yearly 401(k) deferral limit, which is $23,000 for investors under age 50. The full 401(k) limit is $69,000 for 2024, including employee deferrals, employer matches, profit sharing and other deposits.

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Mega backdoor Roth conversions are “a great tool when used appropriately,” but you need to know your goals first, said certified financial planner Jamie Clark, founder of Ruby Pebble Financial Planning in Seattle.

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Here are some common mega backdoor Roth conversion mistakes — and how to avoid them, according to experts. 

Failing to plan for shorter-term financial goals

Missing out on ‘free money’

You always want to be aware of how much money your company is putting into your 401(k).

Tommy Lucas

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Financial advisor at Moisand Fitzgerald Tamayo

“You always want to be aware of how much money your company is putting into your 401(k),” said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

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For 2024, higher earners could hit the $69,000 plan limit with employee deferrals and after-tax 401(k) deposits. Without leaving space for the true-up or employer profit sharing, “you’re just missing out on free money,” he said.

Infrequently converting after-tax 401(k) contributions

Ideally, you want to convert after-tax 401(k) contributions to a Roth account before there’s time for the deposits to grow. Otherwise, you’ll owe taxes on the earnings at the conversion.

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However, “the mechanism for conversion can differ from company to company and plan to plan,” explained CFP Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts.

Before starting after-tax 401(k) contributions, you need to fully understand the process for converting the funds to a Roth account, he added.

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