A worked example
Maxing the plan, and what ends up funding it
Alex, 32, single, earning $220,000 with a 401(k) that allows after-tax contributions and the in-plan Roth conversion. $180,000 pre-tax, $60,000 Roth, $120,000 in a brokerage account, spending $85,000 a year, retiring at 60. The salary is flat in this projection; the contribution ceiling is not.
“My plan allows the mega backdoor. Is there any reason not to max it every single year?”
What the projection shows
For most of a career, no: lifetime tax in present value is $712,941 against $871,080 for putting nothing in the plan, and terminal after-tax wealth is $5,642,621. The problem arrives late and quietly, and it is arithmetic rather than judgement. The contribution ceiling rises every year whether pay does or not — the salary here is flat, which is what eventually makes the ceiling unaffordable — so a year comes when the plan takes more than the income covers and the projection funds the difference out of the pre-tax account. Before 59½ that withdrawal carries the 10% early-withdrawal tax, so the contribution is being fed by a penalty: money leaves one retirement account, is taxed for leaving early, and lands in another. Contributing the maximum is what the plan allows, which is not the same as what the income covers.
What the projection also found
Nothing here was left blank. These follow from the figures above, under the assumptions this example states.
- The year puts $79,314 into the plan while taking $119,830 out of a pre-tax account, and $11,983 of that is the 10% early-withdrawal tax.
The planner arrives with this household already filled in. Change anything — the balances, the ages, the assumptions — and run it as yourself.
A projection under stated assumptions, not financial or tax advice.