An article on our website discussed the potential tax consequences of completing a back-door Roth IRA conversion, which allows high-income earners to contribute to a Roth IRA and enjoy its tax-free earnings and withdrawals.
That article discussed the potential tax perils of this strategy for those who already have one or more Traditional IRAs.
However, there’s another lesser-known strategy that could allow you to make unlimited tax-and-penalty-free Roth conversions every year.
It’s called the mega backdoor Roth conversion. It’s only available to well-paid employees who participate in 401(k) plans with features that enable this strategy.
It’s all about contribution limits
In 2025, you’re allowed to contribute up to $23,500 to your 401(k) with an additional $7,500 of catch-up contributions if you're over age 50. ($11,250 if you’re age 60, 61, 62 or 63).
Let’s say you contribute this entire amount on an after-tax basis to your Roth 401(k) account.
If your company makes matching contributions, it may be able to make them as after-tax Roth 401(k) contributions. Keep in mind that these contributions will count as taxable income.
Now, here’s the thing many people aren’t aware of: In 2025, the maximum combined contribution limit (employee plus employer contributions) is $70,000.
But wait, you might be thinking: “How is it possible to reach that $70,000 limit if I can only contribute $23,500 (or $31,000) per year? My employer matching contribution won’t be anywhere near $39,000 or $46,500.”
The answer is key to the mega backdoor Roth strategy: If your plan allows it, you can make up the difference with additional after-tax contributions that can be converted to Roth 401(k) contributions. Which can eventually be transferred into a Roth IRA tax and penalty free.
Yes, this sounds complicated. So let’s use a hypothetical example.
Jane’s mega-Roth conversion strategy
Remember Jane from the previous article? She’s 59, divorced, and earns $190,000 per year at her company, which disqualifies her from making regular Roth IRA contributions.
However, her 401(k) plan does allow after-tax Roth 401(k) contributions, which she’s never made before.
One advantage of the Roth 401(k) is that you can move assets from this account into a Roth IRA without having to pay taxes or penalties, provided that at least five years have passed since your first Roth 401(k) contribution.
Some 401(k) plans let you complete these conversions even while you’re still participating in your plan, through in-service non-hardship withdrawals.
After speaking with her accountant and financial advisor, Jane decides to take advantage of a not very well-known feature of her 401(k) plan: the ability to make additional after-tax contributions beyond the “regular” $23,500/$31,000 limit.
Jane already has plenty of assets in her pre-tax 401(k) account and in her Traditional IRA. She now wants to build as large a balance in a Roth 401(k) account as possible and eventually convert this money to a Roth IRA, which she plans to leave to her children. When they inherit this account after she passes on, they'll have to empty it out within ten years but the distributions will be tax free.
She’s already committed to making $31,000 in regular and catch-up Roth contributions in 2025. She’s estimated that her company’s total after-tax Roth matching contributions (which vest immediately) will be $7,000. That leaves an opportunity to make $32,000 in additional after-tax contributions to reach the $70,000 combined limit.
Here’s a chart of her contribution strategy.
These “extra” after-tax contributions don’t count as regular Roth 401(k) contributions. But after a short waiting period, she can convert this money to Roth 401(k) status.
So, technically, by the end of the year, her Roth 401(k) account will be worth $70,000 (plus any earnings along the way).
Jane will have to wait five years before she can start making tax-and-penalty-free transfers of contributions and earnings from her Roth 401(k) account to a Roth IRA. During this timeframe, she can continue to use this same mega-contribution strategy to build up the value of her Roth 401(k) account.
After five years, Jane can take advantage of her plan’s in-service withdrawal feature to transfer some or all of her Roth 401(k) assets to fund a new Roth IRA.
She can make as many transfers as she wants to, with no annual limitations—and no tax consequences.
Also, once she establishes her Roth IRA, she will need to wait another five years before she can start taking tax-and-penalty-free withdrawals from that account. (She will be able to make tax-and-penalty-free withdrawals from any money remaining in her Roth 401(k) account, since she's already met the five-year waiting period.)
Note: If she wanted to establish her Roth IRA before that time, she could roll over a small distribution from her Traditional IRA to complete a Roth IRA conversion, or she could use the "non-mega" back-door Roth IRA conversion method. Both strategies would generate taxable income, but at least they would get the "five-year Roth IRA clock" running.
In any case, Jane would want to discuss every piece of her Roth conversion puzzle with her accountant and financial advisor before taking action.
If you want to do this yourself
The first step is to see if your plan offers the key features that allow for mega Roth conversions:
- The ability to make after-tax Roth 401(k) contributions
- The ability to make additional after-tax contributions that can be converted to Roth 401(k) contributions.
- The ability to make in-service non-hardship withdrawals. (If your plan doesn’t you’ll have to wait until you leave your company to directly roll over these assets to a Roth IRA.)
Don’t be surprised if your plan doesn’t offer these features. According to Fidelity Investments, only 10% of their plans do.
Still, even if your plan restricts contributions to the standard $23,500/$31,000 annual limit, you may be able to move your Roth 401(k) contributions and vested after-tax matching Roth 401(k) contributions into a Roth IRA on a regular basis free of penalties or taxes (once you've met the five-year limit) if your plan offers in-service withdrawals.
Be careful
If you’re able to use the mega-backdoor Roth strategy, careful planning is essential, especially if you want your contributions to reach the $70,000 maximum contribution limit.
You need to accurately determine the amount of regular Roth 401(k) and “extra” after-tax contributions that will be withdrawn from each paycheck. If you want your company to make matching Roth 401(k) contributions, you need to figure out how much these will be as well.
You definitely don’t want to “set and forget it.” Monitor these contributions throughout the year, and reduce your contributions if it looks like these total contributions might exceed $70,000 before year-end.
What happens if you blow past this limit? You’ll need to work with your plan sponsor to correct this by removing the excess amount from your account by April 16 of the following year. Your company will not be happy about this, because your mistake could get them into hot water with the IRS.
Remember, too, that you won’t be able to make tax-and-penalty-free withdrawals from your Roth 401(k) to fund your Roth IRA until at least five years have passed since your first contributions.
You’ll also want to weigh the pros and cons of giving up the tax-reducing benefits of pre-tax contributions in order to maximize your after-tax contributions.
That’s why, if you’re able to take advantage of the mega backdoor Roth strategy, you should consider meeting with a tax professional or financial advisor to make sure this strategy makes sense.
This material has been provided for general informational purposes only and does not constitute tax advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional on any tax-related issues.
This article was authored by Martin Baker and Jeffrey Briskin. Martin is a financial advisor and Director of Financial Planning with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. Martin can be reached at 508.598.1082 or mbaker@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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