Mega-Backdoor Roth Conversions: Supercharge Retirement

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Roth IRAs are enticing retirement options for tax purposes. Unlike traditional IRAs, the assets are contributed after-tax (no deduction), but there is no tax on the assets or the growth in value when the assets are withdrawn. Additionally, there are typically no required minimum distributions from the Roth IRA while the owner or a spouse beneficiary are living as long as the assets stay in for five years or more.

This is an attractive option for those with the means to save for retirement, but the catch is that the tax code only allows taxpayers with modified adjusted gross income (MAGI) less than $160,000 for a single taxpayer or $240,000 for married taxpayers to make contributions to a Roth IRA.

What is a “backdoor” Roth conversion?

The tax code does allow taxpayers with MAGI more than the limits to convert existing traditional IRA or 401(k) plan assets to a Roth IRA. Commonly called a backdoor Roth conversion, this technique involves the taxpayer moving funds from an existing traditional retirement account to a Roth and paying income tax on the asset transferred. The rollover to a Roth IRA can boost tax savings if the taxpayer can roll the entire amount over and pay the tax from other assets.

A Roth conversion may be beneficial if the taxpayer does not expect to be in a lower bracket later, does not anticipate withdrawing any assets from the Roth within five years (to avoid penalties), and does not plan to name a charity as the beneficiary of the IRA. This allows taxpayers of any income level to benefit from the advantageous tax treatment of a Roth IRA. A Roth conversion can be particularly useful for those currently in a lower tax bracket than they expect to be in after retirement (consider state as well as federal taxes), taxpayers with losses or deductions in a particular year to offset the income the conversion will generate, and those seeking to avoid more income in retirement where it will impact other expenses, such as Medicare premium surcharges.

How do you make a “Mega-backdoor” Roth conversion?

Some 401(k) plans permit after-tax contributions to a Roth 401(k) account for those who are eligible to make Roth contributions. Others may permit after-tax contributions to the regular 401(k) account in amounts that exceed the limit on deductions for 401(k) contributions. The total amount that the 401(k) rules allow as contributions to a single account is $69,000, or $76,500 for those over age 50. To the extent that the aggregate amount of contributions made by the taxpayer and the taxpayer’s employer to all retirement plan accounts in the taxpayer’s name in a given year is below that number (which is quite a bit higher than the $23,000 tax-deductible 401(k) contribution limit), then you can make an after-tax contribution up to the limit if the 401(k) plan permits it.

These amounts are not treated the same way as Roth contributions. The income and earnings of after-tax traditional 401(k) contributions are taxed upon withdrawal. However, depending upon the terms of the taxpayer’s 401(k) plan, they may be able to convert this additional contribution to a Roth 401(k) account within the plan. If the plan does not permit this, it may permit an “in-service” distribution to a Roth IRA, which will accomplish the same thing.

Plan requirements for a Mega-backdoor Roth conversion

To accomplish the Mega-backdoor Roth conversion, the plan agreement must (1) allow after-tax contributions, (2) contain a Roth 401(k) option or allow in-service distributions, and (3) not rely on the safe harbor under the non-discrimination rules. Note that the availability of this technique depends on the terms of the specific 401(k) plan. While the tax code permits these provisions, it does not require employers to include them. Many employers do not want the added complexity and recordkeeping required when the plan permits after-tax contributions, and many do not want to lose the top-heavy plan exemption, a consequence of permitting after-tax contributions. Finally, these provisions are not included in standardized plan documents that many smaller employers use for the sake of costs and efficiency.

Examples:

Let’s look at some numbers to see how the Mega-backdoor Roth conversion can save taxes when it is available.

Esther is a 40-year-old single taxpayer with MAGI in 2024 of $500,000. She is not eligible to contribute to a Roth IRA in 2024. She is entitled to contribute $23,000 to her employer’s 401(k) plan. Esther’s employer matches the first $5,000 of her contributions. Thus, her total traditional 401(k) contributions are $28,000. This would mean that Esther could make $41,000 in after-tax contributions to the 401(k) if she were interested in the Mega-backdoor Roth strategy. This would require that her employer’s plan allow either for an “in-plan Roth conversion” to convert her after-tax contributions to a Roth 401(k) account or permits “in service” distributions to a Roth IRA.

Elliot is a married taxpayer aged 63, and he and his spouse have MAGI in 2024 of $750,000, which disqualifies him from contributing to a Roth IRA. Elliot has already contributed the $30,500 he is able to contribute to his 401(k) plan (because he is over 50). His employer does not make matching contributions so Elliot may make after-tax contributions of $38,500 this year.

From the numbers above, it is clear that the earlier the taxpayer makes the Mega-contribution the better, as there is more time for the assets to grow tax-free. For Esther, even a single Mega-contribution can have a meaningful impact on what is available in retirement. Ten years’ worth of contributions, particularly when combined with their regular deductible 401(k) contributions, can completely change the style of retirement that Esther and Elliot will enjoy.

Are the rules changing for Roth conversions?

Existing legislation and campaign tax proposals may have an impact on the availability of both regular and Mega-backdoor Roth conversions in the future. On the plus side, more employers are expected to add Roth 401(k) provisions to their plan because of the SECURE 2.0 legislation that requires the over age 50 “make-up contributions” of some employees to go to Roth 401(k) accounts. This will make the Mega-backdoor strategy more available than it is now. Plan administrators can advise if Roth 401(k) accounts or in-service distributions are permitted under the terms of a particular plan.

However, the administration’s 2025 Greenbook, which represents a wish list of changes to the tax laws, contains a proposal that would eliminate the ability to convert from a traditional to a Roth, whether in a 401(k) or an IRA. This means if a taxpayer is a suitable candidate for a backdoor or a Mega-backdoor conversion, and their plan permits it, acting sooner may be better. Furthermore, while future Roth distributions are not taxable or subject to required minimum distributions, this is based on today’s law, and we must keep in mind that Congress can change those rules.