Can a Mega Backdoor Roth Conversion Happen In-Plan?

Q: Some time ago, you wrote in an Ask the Experts column about the mega backdoor Roth strategy but made no mention that the strategy could be completed with an in-plan Roth conversion; instead, you focused on the rollover of assets to an outside Roth IRA. Was this omission intentional or an oversight?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Well, the question to us was focused on using a Roth IRA, but perhaps we could have been clearer that there are other methods of achieving the same objective. But first, for our readers who may not be aware of what a mega backdoor Roth strategy is, it would be prudent for the Experts to provide some background here.

A mega backdoor Roth is a type of strategy, often used by high-income individuals, to make additional after-tax contributions to their retirement plan after they have already contributed elective deferrals up to the 402(g) elective deferral limit ($22,500 in 2023, $30,000 if age 50 or older). Such after-tax amounts are then converted to Roth.

The additional after-tax deferrals may be made up to the 415 limit ($66,000 in 2023), less any employer contributions made on behalf of the employee. For example, if an employee younger than age 50 received $10,000 in employer contributions in 2023, he/she could make pre-tax deferrals up to the 402(g) limit ($22,500). He/she could also make after-tax contributions (if his/her retirement plan permits) up to an additional $33,500 ($66,000 – $22,500 – $10,000 = $33,500). The accumulation of these funds up to $56,000 ($22,500 + $33,500 = $56,000) could then be rolled over into a Roth IRA whenever the plan permits a distribution or, as you have pointed out, simply converted to Roth amounts in-plan, if the plan permits Roth conversions.

However, there is another reason why we did not mention such Roth conversions of after-tax amounts back when the column was originally published in 2016; In-plan Roth conversions of this type were a rare event at that time. The primary reason for such rarity is that Roth accounts in a qualified retirement plan were subject to Required Minimum Distributions (RMDs) and Roth IRAs were not, making the Roth IRA a far more attractive vehicle for Roth balances. The recently enacted SECURE 2.0 Act of 2022, however, changed all that, and now Roth 401(k)/403(b)/457(b) account balances are exempt from RMDs as well (prior to the participant’s death). Thus, we would expect to see a lot more in-plan Roth conversions going forward.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.