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Decoding the Mega Backdoor Roth Strategy
Published Date : July 31, 2025
A Roth IRA allows you to save for retirement with after-tax dollars, enjoy tax-free growth, and access qualified withdrawals tax-free in retirement. Unfortunately, high-income earners are generally barred from making direct Roth IRA contributions due to IRS income limits. A backdoor Roth strategy can be utilized to overcome this hurdle, but a mega backdoor Roth strategy can potentially supercharge your Roth savings. There are two key requirements needed to execute this strategy:
1. A 401(k) plan that allows for after-tax contributions.
2. A 401(k) plan that allows for in-service distributions to a Roth IRA or Roth 401(k).
Only a small fraction of company 401(k) plans allows both steps, so it is important to check your plan documents or contact your plan administrator to understand the features of the plan. For clarity, below are the various types of 401(k) contributions and the tax treatment upon withdrawal in retirement:
| Contribution Type | Funded With | Taxes at Withdrawal in Retirement |
| Pre-tax | Pre-tax dollars | Taxable (contributions + earnings) |
| Roth | After-tax dollars | Tax-free (contributions + earnings) |
| After-tax | After-tax dollars | Contributions: tax-free; Earnings: taxable |
| Employer | Pre- or after-tax | Same tax treatment as contribution type |
In 2025, the 401(k) employee deferral limit (i.e. pre-tax and Roth contributions in aggregate) is $23,500.1 The total 401(k) contribution limit from all sources (i.e. pre-tax, Roth, after-tax,2 and employer contributions in aggregate), however, is $70,000.3 This $70,000 total 401(k) contribution limit is where the mega backdoor Roth strategy comes into play.
For example, if you contribute the 2025 employee maximum of $23,500 and your employer contributes $6,500 on your behalf, that leaves $40,000 before hitting the $70,000 maximum ($70,000 – $23,500 – $6,500 = $40,000). The available after-tax contribution ($40,000) is what fuels the mega backdoor Roth strategy. Now, let’s execute the strategy step-by-step using this example:
1. Make an after-tax contribution of $40,000 to your 401(k).4
2. Immediately convert this after-tax contribution to a Roth IRA or Roth 401(k) utilizing the in-service distribution feature of your retirement plan.
If, for example, you made an after-tax contribution into your 401(k) and left it as is (i.e. only executed Step 1), the contribution ($40,000) would not be taxable on withdrawal since you already paid taxes on it. Only the earnings on this $40,000 would be taxed as ordinary income upon withdrawal in retirement (since it grows tax-deferred in your 401(k)).
Let’s go a step further and assume that your after-tax $40,000 contribution has not yet earned anything. By immediately converting this after-tax contribution to a Roth 401(k) or Roth IRA (i.e. Step 2), you can potentially avoid taxation on the whole $40,000 since you already paid taxes on the contribution and there are no earnings. Once the conversion is complete and funds are in the Roth account, any earnings on this $40,000 will now grow tax-free. And voila, you have successfully executed the mega back door Roth strategy.
Executing a mega backdoor Roth strategy is highly nuanced and complicated. Not all retirement plans allow these features, timing is critical, and tracking after-tax basis and earnings is important to avoid any unexpected taxes. There are many moving parts, so it is important to consider consulting with your Wealth Manager before trying this at home.
Source: www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-70
1 – For those under age 50.
2 – Unlike pre-tax or post-tax Roth contributions, after-tax contributions are not subject to the employee deferral limit.
3 – For those under age 50.
4 – Note that this is on top of your regular pre-tax or Roth contributions.
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