Mega Backdoor Roth: Using After-Tax 401(k) Contributions
A mega backdoor Roth is a strategy that uses after-tax 401(k) contributions, beyond the usual pre-tax or Roth deferrals, and then moves that money into a Roth account. For high income earners who already contribute the standard amount to their workplace plan, it can be a way to build significantly more tax-free retirement savings each year.
The catch is that it only works if your employer's plan allows it, and the mechanics differ from plan to plan. Below, we explain how a mega backdoor Roth 401k works, which plan features it requires, and how it fits into a broader wealth and tax plan.
Start Here: A Complimentary Wealth and Tax Review
Before using this strategy, it helps to confirm your plan allows it and that it fits your cash flow and tax picture. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Your workplace plan: whether after-tax contributions and conversions are permitted
Your cash flow: how much you can comfortably save after other goals
Your tax returns: current and expected future tax situation
Your investment accounts: how Roth assets fit with taxable and pre-tax accounts
Request your wealth and tax review.
How Is a Mega Backdoor Roth Different From a Regular Backdoor Roth?
A regular backdoor Roth uses a nondeductible traditional IRA contribution followed by a conversion to a Roth IRA. Annual IRA contribution limits are relatively modest.
A mega backdoor Roth uses your employer plan instead. 401(k) plans have two separate limits:
The employee deferral limit, which covers your pre-tax and Roth 401(k) contributions.
The overall annual additions limit, which covers employee deferrals, employer contributions, and after-tax contributions combined.
The gap between what you and your employer already contribute and the overall limit is the space a mega backdoor Roth may use. Annual limits apply and are adjusted periodically, so check current figures each year.
What Your 401(k) Plan Must Allow
Two plan features are typically required:
After-tax contributions. These are different from Roth 401(k) deferrals. They are made with money that has already been taxed, but unlike Roth contributions, their earnings are not automatically tax-free.
A way to move after-tax money to Roth. This is usually either an in-plan Roth conversion (sometimes called an in-plan Roth rollover) or in-service withdrawals that let you roll the after-tax money to a Roth IRA while still employed.
Some plans offer automatic conversions shortly after each contribution, which can limit taxable earnings. Your plan document or summary plan description will explain what is available, and your HR or benefits team can confirm.
How the Mega Backdoor Roth Works, Step by Step
Contribute to your regular 401(k) up to the employee deferral limit, pre-tax or Roth.
Make after-tax contributions through payroll, up to the remaining room under the overall limit.
Convert or roll over the after-tax money to a Roth 401(k) or Roth IRA, ideally soon after contributing.
Pay tax on any earnings that accumulated before the conversion. The after-tax contributions themselves are not taxed again.
Timing matters. The longer after-tax money sits before conversion, the more taxable growth it may build.
Common Limitations and Pitfalls
Nondiscrimination testing. Plans must pass testing that compares contributions by highly compensated employees to others. If a plan fails, after-tax contributions may be limited or refunded.
Cash flow. Large after-tax contributions reduce take-home pay. They should fit within a plan that still covers spending, emergency reserves, and other goals.
Plan availability. Many plans do not offer after-tax contributions at all. Small business owners may be able to design a plan that does, which is worth exploring with a plan provider.
Tracking basis. Keep records of after-tax contributions and conversions so the tax treatment is reported correctly.
Rule changes. Lawmakers have discussed limiting this strategy in the past, so confirm current law each year.
Who May the Mega Backdoor Roth Fit?
The strategy may be worth discussing if you:
Already contribute the employee deferral maximum
Have income too high for direct Roth IRA contributions (income limits apply)
Have surplus cash flow you want to save for the long term
Work for an employer whose plan offers the required features
Own a business and are reviewing retirement plan design
It often comes up for executives, physicians, attorneys, and business owners. For business owners, connecting retirement plan design to personal planning is part of wealth management for business owners. Executives may also find our guide to wealth planning for rising executives useful.
How It Fits a Wealth and Tax Plan
A mega backdoor Roth is a tax decision and an investment decision at the same time.
Tax diversification. Building Roth assets alongside pre-tax and taxable accounts can give more flexibility over taxable income in retirement. See retirement planning in Wisconsin.
Comparing options. Money directed to after-tax contributions could instead go to a taxable brokerage account, paying down debt, or other goals. Comparing those choices is part of the plan.
Roth conversion strategy. This may work alongside other conversion strategies. See converting pre-tax savings to Roth.
Legacy. Roth assets can be an efficient asset to leave to heirs, though inherited account rules apply. Coordinate with your estate attorney.
To see how larger annual contributions may grow over time, try the Compound calculator. Results are hypothetical and for illustration only.
This is why the strategy fits naturally where wealth management and tax planning and preparation work together.
Serving Clients Throughout Wisconsin
Compound works with executives, business owners, and families throughout Wisconsin, including Milwaukee, Madison, Waukesha, Brookfield, Green Bay, Appleton, Kenosha, and La Crosse, as well as surrounding areas.
Wondering whether your plan supports a mega backdoor Roth? Request a complimentary wealth and tax review.
Frequently Asked Questions
What is a mega backdoor Roth?
A mega backdoor Roth is a strategy that uses after-tax 401(k) contributions and then converts or rolls that money into a Roth 401(k) or Roth IRA, which may allow more Roth savings than standard limits.
Does every 401(k) allow a mega backdoor Roth?
No. The plan must allow after-tax contributions and either in-plan Roth conversions or in-service withdrawals. Check your plan documents or ask your benefits team.
Are after-tax 401(k) contributions the same as Roth 401(k) contributions?
No. Roth 401(k) contributions count toward the employee deferral limit and grow tax-free if qualified. After-tax contributions fall under the overall limit, and their earnings are taxable unless converted to Roth.
Do I pay tax on a mega backdoor Roth conversion?
Generally, you pay tax only on earnings accumulated before conversion. Converting soon after contributing may help limit that amount.
How much can I contribute with a mega backdoor Roth?
It depends on the overall annual additions limit, minus your deferrals and employer contributions. Annual limits apply and change periodically.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth offers integrated tax planning, wealth management, accounting, and business transition services for business owners, professionals, real estate investors, and families. By considering these areas together, the firm provides a coordinated planning approach designed to help clients navigate financial complexity.
