Mega backdoor Roth

Making after-tax 401(k) contributions above the normal deferral limit and moving them into Roth accounts, if the plan allows.

What it means

Some 401(k) plans accept after-tax contributions on top of regular pre-tax and Roth deferrals, up to an overall annual additions limit the IRS sets, which also counts employer contributions. The mega backdoor Roth moves those after-tax dollars into Roth money, either through an in-plan Roth conversion or an in-service withdrawal rolled to a Roth IRA.

It only works if the plan offers both after-tax contributions and one of those ways out, and many plans do not. Contributions go in after tax, but earnings on them are pre-tax, so converting quickly keeps the taxable amount small. Plan testing rules can also limit how much higher-paid employees may put in.

Example

Suppose an employee puts $20,000 of after-tax money into their 401(k) and converts it to Roth when it has grown to $20,100. Only the $100 of earnings is taxable.

How it’s used

High savers who have maxed out regular deferrals
Building large Roth balances
Employees whose plans offer in-plan conversions

Strengths and weaknesses

Strengths

Can add far more to Roth savings than an IRA allows
No income limit
Converted growth can be tax-free in retirement

Weaknesses

Requires specific plan features
Needs significant spare cash flow
Earnings before conversion are taxable
Contributions may be limited by plan testing

Good to know

Some plans offer automatic in-plan conversions, which keep taxable earnings near zero.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.