How to Do a Mega Backdoor Roth Conversion

The mega backdoor Roth is a retirement savings strategy allowing individuals to contribute more to a Roth account than standard limits permit. It is designed for those who wish to maximize their tax-free retirement funds beyond typical contribution caps. The strategy involves making after-tax contributions to an employer-sponsored retirement plan and subsequently moving those funds into a Roth account, bypassing income limitations.

This approach is particularly useful for high-income earners. For 2025, single taxpayers earning $165,000 or more and married couples filing jointly earning $246,000 or more cannot make direct Roth IRA contributions. The mega backdoor Roth provides an alternative for these individuals to build a substantial nest egg that will not be taxed upon withdrawal. The strategy hinges on specific features within an employer’s retirement plan, making eligibility a primary consideration.

Determining Eligibility and Plan Requirements

Executing a mega backdoor Roth conversion depends entirely on the rules of your employer-sponsored retirement plan, such as a 401(k), 403(b), or governmental 457(b) plan. Your plan must permit after-tax contributions, which are distinct from standard pre-tax or Roth 401(k) contributions. Without the ability to make these specific contributions, the strategy is not possible.

To confirm if your plan allows after-tax contributions, review your Summary Plan Description (SPD). Look for terms like “after-tax contributions” or “voluntary contributions” that are separate from standard deferrals. If the SPD is unclear, contact your plan administrator or your company’s human resources department for clarification.

Your plan must also offer a way to move the after-tax funds out of their initial account. This is accomplished either through an “in-plan Roth conversion,” which moves the money to your Roth 401(k), or an “in-service distribution,” which lets you roll the funds into an external Roth IRA. Some plans may offer an automatic conversion feature, which simplifies the process.

Understanding Contribution Limits and Components

Internal Revenue Code Section 415 sets an overall limit for total annual additions to a defined contribution plan. For 2025, this aggregate limit is $70,000 for individuals under age 50. This cap is the sum of all money added to your account during the year from all sources.

This total limit is comprised of three components. The first is your regular employee contributions, which include pre-tax or Roth 401(k) deferrals up to the $23,500 limit for 2025. The second component consists of all employer contributions, such as a company match or profit sharing.

The third component is your after-tax contributions, which can fill the remaining space up to the overall limit. The amount you can contribute is calculated by taking the total annual limit and subtracting your employee and employer contributions. This remaining amount represents your maximum potential for a mega backdoor Roth conversion.

For example, consider an employee under 50 in 2025 with an overall limit of $70,000. If this employee contributes the maximum $23,500 to their Roth 401(k) and their employer adds a $10,000 match, the total is $33,500. The remaining space is $36,500, meaning the individual could contribute up to that amount in after-tax funds for conversion.

Catch-up provisions can increase these limits for older employees. In 2025, individuals aged 50 to 59 can contribute more, raising their overall limit to $77,500. Those aged 60 to 63 have an even higher catch-up provision, bringing their overall limit to $81,250.

Step-by-Step Guide to Executing the Mega Backdoor Roth

Once you confirm your plan’s eligibility and calculate your contribution space, you can execute the strategy. The first step is to maximize your standard employee contributions for the year, which is $23,500 for those under 50 in 2025. Prioritizing these contributions ensures you take full advantage of the primary tax-advantaged space available.

Next, begin making after-tax contributions. This usually involves logging into your retirement plan’s online portal or contacting the administrator to elect a specific dollar amount or percentage of your paycheck. You must monitor your contributions throughout the year to ensure you do not exceed the overall annual limit.

The final step is converting the after-tax funds into a Roth account. This should be done promptly after the contributions are made to minimize the accrual of taxable investment earnings. Your plan’s rules will dictate which of the two conversion pathways you must follow.

The first pathway is an in-plan Roth conversion. If your plan allows this, you will request that the administrator move the after-tax funds directly into the Roth 401(k) component within the same plan. This is an internal transaction that keeps all funds within your employer’s retirement system.

The second pathway involves a rollover to an external Roth IRA. This is used if your plan permits in-service distributions of after-tax money but does not offer an in-plan conversion. You will request a withdrawal of your after-tax contributions from your 401(k) and then roll them over into a new or existing Roth IRA account.

Tax Reporting for the Conversion

Properly reporting your mega backdoor Roth conversion to the IRS is a necessary step. After the conversion, your 401(k) plan administrator will issue Form 1099-R, which details the total amount of money moved from the after-tax account. The gross distribution amount will be in Box 1.

Box 2a of the form will report the taxable amount of the distribution. Any earnings that accrued on your after-tax contributions before the conversion are taxable as ordinary income and will be included in this box. If the conversion was immediate and there were no earnings, this box might show $0.

When you file your federal income tax return, you must report the information from Form 1099-R. The goal is to differentiate between the non-taxable portion (your original contributions) and the taxable portion (any earnings). This is often done using Form 8606, Nondeductible IRAs.

This process is subject to the pro-rata rule, which determines taxability when an account holds both pre-tax and after-tax funds. If your after-tax 401(k) contributions have generated earnings, the conversion is treated as a proportional distribution of basis (non-taxable contributions) and earnings (taxable). For example, if your after-tax account holds $10,000 in contributions and $1,000 in earnings, 90.9% of any conversion would be tax-free and 9.1% would be taxable.