How to Use the Roth Mega Backdoor Strategy

The mega backdoor Roth is a retirement savings strategy that allows individuals to contribute amounts to a Roth account that exceed the standard annual limits for IRAs and 401(k)s. Its purpose is to build a pool of retirement funds that can be withdrawn tax-free during retirement. This method is advantageous for high-income earners who might be phased out of direct Roth IRA contributions due to income restrictions.

This approach leverages after-tax contributions to a 401(k) plan, which are then moved into a Roth account. The strategy bypasses the usual contribution ceilings, creating a larger nest egg that is not subject to taxes upon withdrawal in retirement.

Eligibility and Plan Requirements

The ability to execute a mega backdoor Roth strategy depends on the features offered by an employer’s 401(k) plan, as not all plans permit this. The first requirement is that the 401(k) plan must accept after-tax employee contributions. These are distinct from pre-tax or Roth 401(k) contributions and are made from your paycheck after income taxes have been paid.

The second plan feature is the option for in-service withdrawals or rollovers of these after-tax funds. An in-service withdrawal allows an employee to move money out of their 401(k) while still employed by the company. Without this feature, the after-tax money would remain in the 401(k), where its earnings would be tax-deferred instead of tax-free.

To determine if your plan allows for both features, consult the Summary Plan Description (SPD). This document outlines the plan’s provisions and features. If the language is unclear, contact the plan administrator or the company’s human resources department to ask if after-tax contributions and in-service distributions of those funds are permitted.

Calculating Your Contribution Capacity

The Internal Revenue Service (IRS) sets an overall limit for total contributions to a 401(k) plan, known as the Section 415 limit. For 2025, this limit is $70,000 for individuals under age 50. This cap includes all sources of contributions: your pre-tax or Roth 401(k) deferrals, all employer contributions, and the after-tax contributions for the mega backdoor.

To calculate your capacity for a mega backdoor Roth contribution, start with the overall IRS limit. From this total, subtract your regular employee contributions, which in 2025 is capped at $23,500 for those under 50. Next, subtract the total amount of any contributions made by your employer. The remaining amount is the maximum you can contribute in after-tax dollars.

For example, an employee under 50 contributes $23,500 to their 401(k) for 2025, and their employer provides a matching contribution of $10,000. The calculation would be: $70,000 (Overall Limit) – $23,500 (Employee Contribution) – $10,000 (Employer Match) = $36,500. This employee can contribute an additional $36,500 in after-tax funds.

For individuals age 50 and over, the standard catch-up contribution raises the overall limit to $77,500 for 2025.

Executing the Mega Backdoor Roth Strategy

The process begins with making after-tax contributions to your 401(k) plan. This is managed through your employer’s payroll system or the 401(k) provider’s online portal, where you designate a specific amount of your paycheck as an after-tax contribution. This election is separate from your regular pre-tax or Roth 401(k) deferrals.

The next step is to initiate the movement of these after-tax funds into a Roth account. This conversion should be done as quickly as possible after the contributions are made to minimize any potential earnings, which would be taxable. Contact your 401(k) plan administrator to request a distribution of your after-tax contributions, which involves completing distribution or rollover paperwork.

The paperwork will require you to specify where the funds are going. You have two options: a direct rollover to a Roth IRA at a separate financial institution, or an in-plan conversion to a Roth 401(k) if your plan offers this feature. The plan administrator will then process the request, moving the principal amount of your after-tax contributions to the designated Roth account.

Taxation and Reporting of Conversions

The tax treatment of the conversion is straightforward. The principal portion of the rollover, which consists of your after-tax contributions, is not taxed again. However, if those after-tax contributions generated any earnings while in the 401(k) account, those earnings are subject to ordinary income tax in the year the conversion occurs.

For example, if you contributed $30,000 in after-tax funds and it grew to $30,500 before you converted it, the original $30,000 would be rolled over tax-free. The $500 of growth would be added to your taxable income for that year. This is why it is advised to convert the funds quickly after they are contributed to minimize taxable earnings.

For tax compliance, you will receive Form 1099-R from your plan administrator. This form reports the total distribution from your 401(k) and includes codes in Box 7 that indicate to the IRS that it was a rollover.