Pairs Trading: How to Make Money Whether the Market Goes Up or Down
The Mega-Roth Rollover: How to Stuff $69,000 Into a Roth IRA Every Year
๐ WHO THIS IS FOR
- Target Profile: High-Income Employees (Tech, Finance, Consulting) whose 401(k) plans allow “After-Tax Contributions.”
- Primary Objective: Tax-Free Wealth Maximization (Bypassing the standard $23,000 deferral limit).
- Not Suitable For: Employees with restrictive 401(k) plans (no After-Tax option) or those who cannot afford to save >$23k/year.
EXECUTIVE SUMMARY
- The Limit Myth: Most people think the 401(k) limit is $23,000 (2024). That is only the “Elective Deferral” limit. The Total Limit (Section 415(c)) is actually $69,000.
- The Gap: $69,000 (Total) – $23,000 (Your Contribution) – $10,000 (Employer Match) = $36,000 Remaining Space. This space is often wasted.
- The Strategy: You fill this gap with “After-Tax” (Non-Roth) contributions. Then, you immediately convert/roll over these funds to a Roth IRA or Roth 401(k). Since you already paid tax on the principal, the conversion is tax-free (except for small gains).
- Authority Baseline: IRS Notice 2014-54 explicitly blessed the “split rollover,” allowing you to send After-Tax basis to a Roth IRA and growth to a Traditional IRA, unlocking this strategy fully.
The “Backdoor Roth” ($7,000 limit) is for the middle class. The “Mega Backdoor Roth“ ($46,000+ limit) is for the heavy hitters. It turns your corporate 401(k) into a massive tax-free wealth accumulation engine. According to Team BMT Analysis, this is the single most powerful perk in the modern 401(k) landscape, yet fewer than 10% of eligible employees use it. Source: Fidelity Viewpoints / Kitces Research
Scenario: You maxed out your $23,000 Pre-Tax 401(k). Employer matched $7,000. Total: $30,000.
- Step 1 (The Fill): You contribute an additional $39,000 to the “After-Tax” bucket of your 401(k).
Tax Status: You get no deduction. Money grows tax-deferred. - Step 2 (The Move): You call Fidelity/Vanguard and say: “Convert my After-Tax balance to Roth.”
Tax Hit: $0 (assuming you do it immediately before gains occur). - Result: You now have $39,000 in a Roth account. It grows tax-free forever. Repeat annually.
Impact: Over 20 years at 8%, this extra bucket grows to ~$1.8 Million tax-free.
BMT Verdict: If your plan allows “After-Tax Contributions” and “In-Plan Roth Conversions” (or In-Service Withdrawals), using a taxable brokerage account before maxing this out is a mathematical error. The Mega Roth offers the same investment options but eliminates the tax drag on dividends and capital gains.
Account Hierarchy Efficiency
| Account Type | Tax Efficiency Score (1-10) |
|---|---|
| Taxable Brokerage | 5 |
| Traditional 401(k) | 7 |
| Mega Roth (After-Tax -> Roth) | 10 |
*Chart Note: The Mega Roth scores a perfect 10 because it combines high contribution limits ($69k) with tax-free exit. It beats the brokerage account because it avoids the 23.8% capital gains tax drag annually.
Legislative Threat: The “Build Back Better” Act of 2021 proposed banning the Mega Backdoor Roth for high earners. It caused panic, but the provision was stripped from the final bill. As of 2025, the strategy remains legal and fully operational. However, this close call suggests you should “make hay while the sun shines.”
โ BOUNDARY CLAUSE: This Structure Breaks Down If:
- ACP Testing Failure: If your company fails the “Actual Contribution Percentage” (ACP) test (meaning only rich employees use this), the plan may force you to take the money back (refund) at year-end. This is common in smaller companies.
- Delayed Conversion: If you wait 5 years to convert, the After-Tax bucket will have huge gains. Converting then triggers a tax bill on the gains. Speed is critical.
Execution Protocol
Check your Summary Plan Description (SPD). Look for two phrases: 1. “After-Tax Employee Contributions” (Not Roth, specifically After-Tax). 2. “In-Plan Roth Conversion” OR “In-Service Withdrawal of After-Tax accounts.” If you have both, you are green-lit.
Top-tier custodians (Fidelity, Charles Schwab) now offer “Automated In-Plan Conversion.” Check a box, and every time you contribute After-Tax money, it instantly converts to Roth the same day. This eliminates the “gain tax” risk entirely.
Do not over-contribute. If you hit the $69,000 limit early (e.g., in October), you might miss out on the Employer Match for November/December because you can’t contribute anymore. Pace yourself to hit the max on the last paycheck of the year (“True-Up” provision helps, but not all plans have it).
This is an “Arbitrage of Complexity.” The benefit exists because the rules are too complex for the average employee to navigate. Once you automate it, it becomes the most effortless wealth builder in your arsenal.
WEALTH STRATEGY DIRECTIVE
- Do This: If you have cash sitting in a savings account earning 4% (taxable), increase your payroll deduction to the max After-Tax limit and live off the savings. You are effectively laundering taxable cash into a tax-free Roth.
- Avoid This: Confusing “Roth 401(k)” with “After-Tax 401(k).” They are separate buckets. Roth 401(k) shares the $23,000 limit with Pre-Tax. After-Tax 401(k) uses the $69,000 limit.
Frequently Asked Questions
Can I withdraw the money?
If you roll it to a Roth IRA, the basis (your contribution) is accessible anytime tax-free (because it was already taxed). The growth is subject to the 5-year rule. It is remarkably liquid.
What if I have gains before converting?
If your $10,000 contribution grew to $10,100 before you converted, you pay ordinary income tax on the $100 gain. The $10,000 converts tax-free. It’s a minor nuisance, not a dealbreaker.
Does the Pro-Rata rule apply?
Generally no, if done correctly. Unlike the regular Backdoor Roth IRA (which looks at all your IRAs), the Mega Backdoor usually isolates the After-Tax sub-account within the 401(k), avoiding the Pro-Rata mess of existing Traditional IRAs.