How Does the Roth IRA Mega Backdoor Work?

The Roth IRA mega backdoor is a strategy that enables high-income earners to contribute more to a Roth account than standard contribution limits allow. The process depends on specific features of an employer-sponsored retirement plan. It involves making after-tax contributions to a 401(k) plan and then converting those funds into a Roth account, such as a Roth IRA or a Roth 401(k).

Eligibility and Plan Requirements

The ability to execute a mega backdoor Roth strategy hinges on two features within an employer’s 401(k) plan. The first is the option to make after-tax contributions. These are different from pre-tax contributions, which reduce your taxable income, and Roth 401(k) contributions, which are subject to annual employee contribution limits.

The second feature is the plan’s allowance for either in-service withdrawals of these after-tax funds or in-plan conversions to a Roth 401(k). An in-service withdrawal allows you to move the after-tax money out of your 401(k) and into an external Roth IRA while you are still employed. An in-plan conversion lets you convert the after-tax portion of your 401(k) directly into a Roth 401(k) within the same plan.

To determine if your plan allows for these features, you will need to review your plan’s summary plan description or other official plan documents. These documents outline the types of contributions you can make and the rules regarding withdrawals and conversions. If the information is unclear, contact your plan administrator or human resources department.

If your plan does not permit after-tax contributions or does not allow for in-service withdrawals or conversions, you will not be able to utilize the mega backdoor Roth strategy. You must confirm these details before attempting to make any contributions.

Understanding the Contribution Limits

The mega backdoor Roth strategy is made possible by the overall contribution limit for defined contribution plans. For 2025, this limit is $70,000 for individuals under age 50. This total limit includes all contributions made to your 401(k) in a given year, encompassing your employee contributions, employer contributions, and after-tax contributions.

To calculate your personal mega backdoor contribution room, start with the overall plan limit of $70,000 for 2025. From this amount, subtract your total employee contributions, up to the employee limit of $23,500 for 2025. Then, subtract all employer contributions made on your behalf, such as matching funds or profit sharing. The remainder is the maximum you can contribute in after-tax dollars.

For example, an employee under 50 contributes the maximum $23,500 to their 401(k) in 2025. Their employer contributes a $5,000 match. To find their available after-tax contribution space, they would take the $70,000 limit and subtract their $23,500 contribution and the $5,000 employer match. This leaves them with $41,500 that they can contribute as after-tax funds.

Individuals aged 50 and over can make additional catch-up contributions. For 2025, a catch-up contribution of $7,500 is available for those aged 50 and over, and a higher amount of $11,250 is available for those aged 60 to 63. These catch-up contributions do not count against the $70,000 overall plan limit.

The Mega Backdoor Process Step-by-Step

The first step in the mega backdoor process is to make after-tax contributions to your 401(k) plan. This is done through your employer’s payroll system, similar to how you set up regular pre-tax or Roth 401(k) contributions. You will need to specify the amount you wish to contribute each pay period as an after-tax contribution.

The second step is to execute the conversion, which moves the after-tax funds into a Roth account. There are two primary ways this can be accomplished, depending on your plan’s rules. The first is an in-plan conversion to a Roth 401(k), where you request your plan administrator to convert your after-tax contributions.

The second path is an in-service withdrawal and rollover to an external Roth IRA. You can request a distribution of those funds and have them transferred directly to your Roth IRA custodian. Alternatively, the plan administrator can issue you a check, which you then have 60 days to deposit into a Roth IRA.

It is advisable to perform the conversion as soon as possible after making the after-tax contribution. This is because any earnings on the after-tax contributions will be taxable upon conversion. By converting the funds quickly, you can minimize the amount of taxable earnings.

Tax Consequences of the Conversion

The principal amount of your after-tax contributions can be converted or rolled over to a Roth account completely tax-free. This is because you have already paid income tax on these funds.

Any investment earnings that have accrued on your after-tax contributions before the conversion are subject to ordinary income tax in the year the conversion takes place. For example, if you contribute $20,000 in after-tax funds to your 401(k) and it grows to $20,500 before you convert it, the $500 in earnings will be considered taxable income.

When you convert or withdraw from your after-tax balance, the distribution is treated as a mix of your non-taxable after-tax contributions and any taxable earnings. This is why it is beneficial to execute the conversion quickly after making the contribution, as it minimizes the potential for taxable gains.

When you perform the conversion, your plan administrator will provide you with a Form 1099-R that details the transaction. This form will show the total amount of the distribution and the taxable portion, if any. You will need to report this information on your tax return for the year of the conversion.