Should I Invest 100% in Roth?

August 9, 2023

When deciding between contributing to a traditional or Roth 401(k) based on your current tax situation, and for the Mega backdoor Roth conversion, you need to check if your employer’s plan allows it and consider other options if you are in a high tax bracket.

Want to know what to do with your next dollar? You need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.


He has a question for you guys. He says, “I’m confused about Roth 401(k) and the potential of Mega backdoor Roth IRAs. I’m currently 24 years old maxing out my 401(k) with 50% Roth and 50% traditional. Should I be switching to 100% Roth? How should he think about this?”

Alright, so there are a couple of different questions here. I’ll answer them in rapid fire and try to leave some meat on it. First, should I do pre-tax or Roth? Generally speaking, that’s a tax bracket question. Age comes into play too. He said he was 24. Yes, that comes into play. Generally speaking, it’s a tax bracket question because a 24-year-old who’s in the 37% bracket might still qualify for doing pre-tax contributions. It’s almost like taxes first, but then age and other elements. I agree with that.

Now, what’s really interesting is he has something different. He says, “Hey, I’m getting so confused around Roth 401(k) and this Mega backdoor Roth that I hear you guys talk about.” We want to be very clear, those are not the same thing. Those are different things.

Let me set it up. You may not know this if you’ve only ever just paid attention to open enrollment during the time of the year where you do open enrollment, you ever looked at your plan. A lot of people don’t realize there are three different ways you can contribute to a 401(k). There are pre-tax contributions, there are Roth contributions, and then there’s this third category called after-tax contributions. After-tax and Roth are not the same, and not all plans provide them. It’s only if you have the after-tax contribution option inside your 401(k) plan that you could perhaps carry out the Mega backdoor Roth. Adam, I wouldn’t put too much pressure on yourself. If you’re maxing out your Roth 401(k), that’s the current year, we’re doing this is $22,500. That’s pretty outstanding. That’s great news.

Now, when we talk about the apex predator of the Mega backdoor Roth conversion strategies, that extra bucket is the after-tax contributions. Your plan provider had to have actually structured the plan to where you have first the after-tax option, and then you also have to have the ability to do a conversion process, whether it’s distributing the money out, taking an in-service distribution, or even doing a conversion directly in the plan. You also have to be careful that you don’t squeeze out your employer’s contribution because there’s a 415 limit in the industry. We talk about $66,000 for this year. $66,000 is the total, that’s when you add it up. You’re $22,500 plus your match, plus the profit-sharing, plus any other contributions that your employer is making. You want to make sure your after-tax is all the way up to the $66,000 and doesn’t squeeze out any of the employer money. If you do that, they get to keep it and you’re just stuck with it. But it is a very powerful planning opportunity for those that work for companies that have taken the steps to make that happen.

Now, I do want to make sure, because there are going to be some self-employed people who are going to say, “Well, man, I need to go set this up. I’m smart, I’m good with money, I need to do this.” I would caution, don’t just assume everybody should be doing Mega backdoor Roth conversions because you might find that there are better alternatives. More than likely, if you are self-employed or an executive, you’re in the highest of high tax brackets, so you’re probably more than likely going to benefit from the pre-tax contributions and then strapping on not only a 401(k) and a profit-sharing plan but probably a cash balance. There are other ways, even though we call it an apex predator because it’s a Roth from tax savings method, it’s an apex predator. But if you’re just trying to minimize taxation because you’re in that uber-high tax bracket, there are usually other planning alternatives out there that you ought to look into. Love it. For more information, check out our free resources.



Most Recent Episodes

What I Learned From Being BROKE!!! (And Why I Wouldn’t Change It)

No one disputes the fact that being broke isn’t great. We want to spread the word that no matter where you came from, you can build wealth. In this episode, Brian and Bo share personal stories about their journey to wealth and lessons they learned along the way....

Top 10 Mind-Blowing Money Stats (2023 Edition)

These 10 money stats will blow your mind! We’ll discuss the unbelievable amount of money Americans save, when most reach millionaire status, and how many Americans carry a credit card balance. Research and resources from this episode: Most Americans don't have enough...

Wealth Multiplier Revealed: The Magic of Compound Interest!

There’s a reason why Albert Einstein called compounding interest the eighth wonder of the world! Do you know exactly how it works and how much your dollars could turn into by retirement? The Money Guy Wealth Multiplier can show anyone just how powerful every dollar...

From $0 to Millionaire in 10 Years (Is it Possible?)

How can you become a millionaire in 10 years or less? We’ll discuss common ways we see millionaires build wealth quickly, including through real estate, entrepreneurship, and the stock market. Discover how real wealth is built and why building wealth quickly may not...

Financial Advisors React to INFURIATING Money Advice on TikTok!

Brian and Bo are BACK to react to some more TERRIBLE financial TikTok advice! Join us as we take a look at some of the worst financial advice on the platform and tell you what to actually focus on in your own financial life. Enjoy the Show? Sign up for the Financial...

Investing Showdown: Dollar Cost Averaging vs. Lump Sum!

It’s a debate as old as time: what’s better, dollar cost averaging or lump sum investing? In this episode, we’ll cover the nuances and pros and cons of both, including in-depth case studies comparing investors at different times. Research and resources from this...

Is Inflation Really Ruining Your Finances? (You Won’t Like the Answer)

Inflation has changed our daily living expenses dramatically over the last few years. While we can’t control all of our expenses, there are many things in your control that can help you become a Financial Mutant and build wealth better than your peers. Enjoy the Show?...

Are $1,000 Car Payments Becoming the New Norm?!

New data shows more Americans than ever have car payments over $1,000. Is this becoming the new normal? How much could having a car payment of $1,000 be costing you for retirement? For more information, check out our Car Buying Checklist!