What Is a MegaRoth and How Does It Work for Retirement Savings?

Saving for retirement can be complex, especially for high earners looking to maximize tax advantages. One strategy gaining traction is the MegaRoth, which allows individuals to contribute more to a Roth account than standard limits typically permit. This approach leverages after-tax contributions and conversions to build tax-free retirement savings.

After-Tax Contributions and Their Role

Traditional retirement accounts have strict contribution limits, but after-tax contributions allow individuals to exceed those caps. In 2024, employees can contribute up to $23,000 in pre-tax or Roth dollars to a 401(k), with an additional $7,500 for those 50 and older. However, the total contribution limit—including employer matches, profit-sharing, and after-tax contributions—reaches $69,000 (or $76,500 for those 50 and older). The gap between the standard deferral limit and the total contribution cap is where after-tax contributions become valuable.

Unlike pre-tax contributions, after-tax contributions do not reduce taxable income in the year they are made. However, they grow tax-deferred and can be converted into a Roth account, enabling tax-free growth and withdrawals in retirement. This strategy allows individuals to move more money into a Roth environment than standard rules permit.

Not all 401(k) plans allow after-tax contributions, so employees should check plan documents or consult HR. Even when permitted, employer matching formulas and plan structures can limit how much after-tax money can be contributed before reaching the overall plan limit.

In-Plan Conversion Options

After making after-tax contributions, the next step is converting those funds into a Roth account. An in-plan Roth conversion moves after-tax contributions into a Roth 401(k) or Roth IRA, ensuring future gains grow tax-free. Delaying conversion can result in taxable earnings on the contributions.

Some plans offer automatic or periodic in-plan Roth conversions, routinely transferring after-tax funds into the Roth portion of the 401(k). If automatic conversion is unavailable, employees must manually request a conversion, which may require additional paperwork. Some plans also limit how frequently conversions can be processed, making it important to understand plan-specific rules to avoid unnecessary taxable growth.

When converting within the same 401(k), only earnings on after-tax contributions are taxed at the time of conversion. The original after-tax contributions move into the Roth portion tax-free. If earnings accumulate before conversion, they are taxed as ordinary income, potentially increasing the tax bill for the year. Frequent conversions, often called the “mega backdoor Roth” strategy, help minimize taxable earnings.

Regulatory Steps for Compliance

Employers offering a MegaRoth strategy must ensure their plans comply with IRS regulations, particularly nondiscrimination testing and contribution limits. One challenge is the Actual Contribution Percentage (ACP) test, which ensures after-tax contributions from highly compensated employees (HCEs) do not disproportionately exceed those of non-highly compensated employees (NHCEs). If a plan fails this test, excess contributions may be refunded, reducing the effectiveness of the strategy. Some employers use a safe harbor 401(k) plan to bypass this testing, but this must be explicitly stated in the plan’s design.

Plan administrators must also ensure total contributions—including employee deferrals, employer matches, and after-tax contributions—do not exceed the IRS’s annual limit of $69,000 in 2024 (or $76,500 for those 50 and older). Failure to enforce these limits can result in penalties and required corrective distributions. Employers often use automated tracking systems to prevent excess contributions. Employees should also monitor their contributions, especially if they change jobs mid-year, as limits apply per individual, not per plan.

Tax Reporting Considerations

Executing a MegaRoth strategy requires careful tax reporting to avoid unexpected liabilities or penalties. When after-tax contributions are converted to a Roth 401(k) or Roth IRA, the transaction must be accurately reported on both the plan sponsor’s records and the participant’s tax return. Form 1099-R is issued by the plan administrator to reflect the conversion, distinguishing between the non-taxable basis (the original after-tax contributions) and any taxable earnings. The IRS closely reviews these forms, particularly for large conversions, making accurate classification essential.

Earnings on after-tax contributions before conversion must be reported as ordinary income in the year of conversion and included on the taxpayer’s Form 1040. If these earnings are not accounted for, they can trigger underpayment penalties, especially if the additional income pushes the individual into a higher tax bracket. Estimated tax payments may be necessary to avoid penalties under IRS safe harbor rules, which require either 90% of the current year’s tax liability or 100-110% of the prior year’s liability to be paid throughout the year.

Distribution Rules

Roth accounts have different withdrawal rules than traditional retirement plans, and failing to follow them can result in unexpected taxes or penalties.

Roth 401(k) accounts are subject to required minimum distributions (RMDs) starting at age 73 unless the funds are rolled into a Roth IRA, which does not have RMD requirements. Many retirees transfer funds to a Roth IRA before RMDs begin to preserve tax-free growth.

For a withdrawal to be tax-free, the account must have been open for at least five years, and the account holder must be at least 59½ years old, disabled, or using the funds for a first-time home purchase (up to $10,000 for Roth IRAs). If these conditions are not met, any earnings withdrawn may be subject to income tax and a 10% early withdrawal penalty.