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 versus $871,080 for putting nothing in the plan, and ending after-tax wealth is $5,642,621. The problem shows up late, and it's arithmetic rather than judgment. The contribution limit rises every year whether pay does or not, and the salary here is flat, so eventually a year arrives when the plan takes more than the income covers and the projection funds the difference from the pre-tax account. Before 59½ that withdrawal carries the 10% early-withdrawal penalty, so the contribution is being paid for with a penalty: money leaves one retirement account, gets taxed for leaving early, and lands in another. Contributing the maximum is what the plan allows, which isn't the same as what the income covers.