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If insurance policies stopped pretending to be investments, we’d all like them a whole lot better.
I WAS RECENTLY asked about strategies that high earners can use to reduce their tax bill.
Most people know the usual options. They contribute to a 401(k), fund a health savings account or make a Roth IRA contribution through the backdoor method. Business owners may have additional opportunities through retirement plans and business structures.
But there's another strategy worth knowing about: the Mega Backdoor Roth (MBDR).
The MBDR allows some workers to put far more money into Roth accounts than the usual contribution limits permit.
Consider somebody who contributes the maximum $24,500 to a 401(k) in 2026 and receives a $5,000 employer match. If the employer's retirement plan allows after-tax contributions, that worker may be able to contribute an additional $42,500 to the retirement plan.
This is because the total 401(k) contribution limit for 2026 is $72,000. That limit includes employee contributions, employer contributions and after-tax contributions. Subtract the $24,500 employee contribution and the $5,000 employer match, and there's room for another $42,500. Workers age 50 and older might be able to contribute even more ($80,000 total 401(k) limit in 2026) because of catch-up provisions.
For savers who have already exhausted other retirement account options, this can be a powerful way to build additional tax-free savings.
Your employer's retirement plan must permit after-tax contributions.
Many plans don't. According to Fidelity, only about 11% of employer-sponsored 401(k) plans offer MBDR conversions.
If you log into your retirement plan and review your contribution options, you may see a category labeled "after-tax." That's the option you need:
Importantly, don't confuse it with a Roth 401(k). They're similar, but different. Small-business owners with a solo 401(k) may also be able to use this strategy if their plan allows.
The MBDR process generally involves two steps:
Depending on your plan, the money may be rolled into either a Roth IRA or a Roth 401(k).
The rules vary from plan to plan. Check your plan documents or summary plan description before enganging in this strategy.
Suppose you've already maxed out your traditional 401(k) contribution and completed a backdoor Roth IRA contribution. You now have additional money to invest.
One option is a taxable brokerage account. Another is the Mega Backdoor Roth.
The Roth strategy offers several potential advantages:
A taxable brokerage account also has advantages:
That flexibility shouldn't be overlooked. Retirement accounts come with restrictions, and those restrictions may matter depending on your goals.
Importantly, some plans allow you to move after-tax contributions to either Roth IRA or Roth 401(k) accounts. A Roth 401(k) may be simpler because some plans offer automatic conversions. A Roth IRA typically offers a wider range of investment choices. It may also provide greater flexibility when it comes to withdrawals.
I generally prefer the Roth IRA option when it's available. Still, either choice can work well.
After-tax contributions are usually invested while they remain in the 401(k).
If the account earns money before the conversion takes place, those earnings are taxable when moved to the Roth account. For that reason, many investors try to complete the conversion quickly. Some plans even allow automatic conversions.
Suppose you contribute $10,000 to the after-tax portion of your 401(k). Before the conversion occurs, the account earns $100.
You then move the balance to a Roth IRA. The entire $10,100 can be transferred, but the $100 of earnings will generally be taxable if you put it all into Roth IRA. There are plans that allow you to split between Roth and Traditional, which could be helpful.
At year-end, you'll receive Form 1099-R reporting the transaction.
Using the example above, your tax return would show a $10,100 distribution, with $100 generally treated as taxable income.
If you work with a tax professional, make sure they understand exactly what happened. The reporting isn't especially complicated, but it should be handled correctly.
The Mega Backdoor Roth isn't available to everybody. But for those whose retirement plans allow it, the strategy offers a chance to put a substantial amount of additional money into a Roth account and enjoy tax-free growth for years to come.
Have you used this strategy to contribute to your retirement accounts? Let us know in the comments!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
NO. 63: WE CAN’T time the stock market—but we can rebalance our portfolios. There’s no way to guess the market’s direction. But by regularly rebalancing, we can profit from those price swings.
SHORT-TERMISM. To have a bright financial future, we need to save diligently and invest for the long haul. Yet often we think only of today, leading us to spend and invest impulsively. What to do? Try waiting a week before acting on major spending and investing decisions, while also visualizing how great it’ll be to achieve our long-term goals.
TAKE STOCK of your bonds. Our financial lives are chock-full of bond lookalikes, including our paycheck, Social Security and any defined benefit pension—all paying us regular income now or in the future. Set against this income is a big income drain: our debts. Result: Our finances may be more or less risky than our bond position alone suggests.
NO. 20: MONEY worries can make us miserable—which is why not spending can be so smart. If spending leaves us with no savings, and perhaps bills we can’t afford to pay, the result can be great unhappiness. Research suggests that having some $5,000 in a savings account or similar “liquid” form can substantially boost our sense of financial well-being.
NO. 63: WE CAN’T time the stock market—but we can rebalance our portfolios. There’s no way to guess the market’s direction. But by regularly rebalancing, we can profit from those price swings.
My grandson is a senior in college. He has taken some student loans for which the financial resources exist (529 plan) to pay them in full upon graduation. My question is this:
From the perspective of building a strong credit history, should he pay the loans in full after the grace period, or should he make payments for a period of time, say a year or two, before paying them in full?
Note, that any money leftover in the 529 plan will be either transferred to a Roth IRA when feasible,
THE HIGHEST CREDIT score possible is 850, and I’ve hit that mark in eight of the past 12 months. In the other four months, I had a score of either 844 or 846 under the credit rating formula created by FICO, formerly called Fair Isaac Corp.
A FICO score between 800 and 850 is considered exceptional and gets you the best rates on loans. A score of 670 or more is considered “good,” but more doors and opportunities are available when your score hits 740,
Suzie and I are visiting family and enjoying the Victorian grandeur of the coastal towns of southern England, in particular near Brighton where my brother-in-law recently purchased his first home. He’s been expressing nervousness about the new experience of having a mortgage. While chatting during the evening I’ve tried to soothe his mind with a version of this, I admit, slightly left-field argument. It seemed to help him and I thought I’d share my thoughts.
When my wife Suzie retired in June last year,
I HATE DEBT. A very happy day was when we paid off the mortgage. I’d rather walk on broken glass than pay a penny of interest on my credit cards. But there have been a few exceptions to my usual rule, all involving car purchases.
The first was many years ago when I reached what I thought was an all-cash deal on a new car. The salesman surprised me when he offered the same price with 0% financing.
MY WIFE AND I BOUGHT our first home in the mid-1980s. We were thrilled to get an 8% mortgage, though we had to pay three points—an upfront fee equal to 3% of the loan amount—to get that rate. Many of our friends had bought a few years earlier and were paying 14%, a common occurrence back then, according to Freddie Mac data.
We kept our eyes open for opportunities to refinance our high rate.
AN ARTICLE PUBLISHED in The Wall Street Journal told the story of Americans in their 30s who are spending heavily and piling on debt as we leave the pandemic behind.
One family with an income of $80,000 in Lincoln, Nebraska—where the cost of living is low, with housing costs 22% below the national average—had $20,000 in credit card debt and $160,000 in student loans.
They used stimulus checks to work down their credit card debt.
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I WAS RECENTLY asked about strategies that high earners can use to reduce their tax bill.
Most people know the usual options. They contribute to a 401(k), fund a health savings account or make a Roth IRA contribution through the backdoor method. Business owners may have additional opportunities through retirement plans and business structures.
But there's another strategy worth knowing about: the Mega Backdoor Roth (MBDR).
The MBDR allows some workers to put far more money into Roth accounts than the usual contribution limits permit.
Consider somebody who contributes the maximum $24,500 to a 401(k) in 2026 and receives a $5,000 employer match. If the employer's retirement plan allows after-tax contributions, that worker may be able to contribute an additional $42,500 to the retirement plan.
This is because the total 401(k) contribution limit for 2026 is $72,000. That limit includes employee contributions, employer contributions and after-tax contributions. Subtract the $24,500 employee contribution and the $5,000 employer match, and there's room for another $42,500. Workers age 50 and older might be able to contribute even more ($80,000 total 401(k) limit in 2026) because of catch-up provisions.
For savers who have already exhausted other retirement account options, this can be a powerful way to build additional tax-free savings.
The catch
Your employer's retirement plan must permit after-tax contributions.
Many plans don't. According to Fidelity, only about 11% of employer-sponsored 401(k) plans offer MBDR conversions.
If you log into your retirement plan and review your contribution options, you may see a category labeled "after-tax." That's the option you need:
Importantly, don't confuse it with a Roth 401(k). They're similar, but different. Small-business owners with a solo 401(k) may also be able to use this strategy if their plan allows.
The MBDR process generally involves two steps:
Depending on your plan, the money may be rolled into either a Roth IRA or a Roth 401(k).
The rules vary from plan to plan. Check your plan documents or summary plan description before enganging in this strategy.
Why use it?
Suppose you've already maxed out your traditional 401(k) contribution and completed a backdoor Roth IRA contribution. You now have additional money to invest.
One option is a taxable brokerage account. Another is the Mega Backdoor Roth.
The Roth strategy offers several potential advantages:
A taxable brokerage account also has advantages:
That flexibility shouldn't be overlooked. Retirement accounts come with restrictions, and those restrictions may matter depending on your goals.
Importantly, some plans allow you to move after-tax contributions to either Roth IRA or Roth 401(k) accounts. A Roth 401(k) may be simpler because some plans offer automatic conversions. A Roth IRA typically offers a wider range of investment choices. It may also provide greater flexibility when it comes to withdrawals.
I generally prefer the Roth IRA option when it's available. Still, either choice can work well.
Mind the earnings
After-tax contributions are usually invested while they remain in the 401(k).
If the account earns money before the conversion takes place, those earnings are taxable when moved to the Roth account. For that reason, many investors try to complete the conversion quickly. Some plans even allow automatic conversions.
Suppose you contribute $10,000 to the after-tax portion of your 401(k). Before the conversion occurs, the account earns $100.
You then move the balance to a Roth IRA. The entire $10,100 can be transferred, but the $100 of earnings will generally be taxable if you put it all into Roth IRA. There are plans that allow you to split between Roth and Traditional, which could be helpful.
At year-end, you'll receive Form 1099-R reporting the transaction.
Using the example above, your tax return would show a $10,100 distribution, with $100 generally treated as taxable income.
If you work with a tax professional, make sure they understand exactly what happened. The reporting isn't especially complicated, but it should be handled correctly.
The Mega Backdoor Roth isn't available to everybody. But for those whose retirement plans allow it, the strategy offers a chance to put a substantial amount of additional money into a Roth account and enjoy tax-free growth for years to come.
Have you used this strategy to contribute to your retirement accounts? Let us know in the comments!
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