The Mega Backdoor Roth Strategy: A Tax-Free Retirement Savings Strategy for High-Cash-Flow Individuals
Todd Rowe is a Principal Wealth Advisor at Compound. He has nearly two decades of experience guiding families through tax planning, wealth planning, and estate planning strategies.
You’ve maxed out your 401k at the $24,500 threshold and moved on. Most high earners do.
But here's what you're missing: If your employer plan allows after-tax contributions, you have access to one of the most powerful retirement strategies available — the mega backdoor Roth.
You can funnel an additional $30,000-$50,000+ into tax-free retirement accounts every year.
Most people don’t know about this opportunity.
Even if they do know the opportunity exists, they might not know there’s a critical second step they need to act on that makes or breaks everything.
Key Takeaways:
- The mega backdoor Roth lets you contribute an additional $30,000-$50,000+ annually to Roth accounts for tax-free growth and withdrawals in retirement.
- Converting your after-tax contributions to Roth as quickly as possible is critical.
- Most employers don't offer this benefit, and it could disappear in the future.
An Opportunity Hiding in Plain Sight
Only a quarter of employer plans (24% in 2024) offer after-tax 401k contributions, and those are mostly with large companies. That’s a huge opportunity for compounding tax-free growth, and it’s rare.
“After-tax 401k contributions” explained: After-tax 401k contributions are a third type of 401k contribution (in addition to pre-tax and Roth). There’s no upfront tax savings, and the “earnings” on those contributions (appreciation + investment income) grow tax-deferred, but not tax-free like a Roth. In order to take advantage of the mega backdoor Roth strategy, you’ll need the ability to make after-tax 401k contributions, prior to converting them to Roth.
Over decades, you could save potentially millions of dollars that will never be taxed on withdrawal.
But even people pursuing this strategy may still miss the critical part of converting their contributions to a Roth.
The "mega backdoor Roth strategy" is a two-step process:
- First, you make after-tax 401k contributions.
- Then, you convert them to Roth.
You need to convert the contributions to make them tax-free. Otherwise, your money is only growing tax-deferred.
A Roth conversion moves money from a pre-tax or after-tax retirement account into a Roth account. This triggers taxes, but in the case of after-tax accounts, only on the growth — not the original contributions.
For example, if you contributed $10,000 in after-tax dollars and it grew to $10,200 before converting, you'd only owe taxes on the $200 gain at your regular income tax rate.
When converting after-tax 401k contributions to Roth, it can be a very powerful strategy. Especially if you convert quickly.
What Qualifies You for a Mega Backdoor or Backdoor
- Backdoor Roth IRA Strategy
- Individual accounts (not part of an employer plan)
- $7,500+ maximum contribution (+ additional $1,100 “catch up” if you’re over 50)
- Works for individuals without existing pre-tax IRA assets (Traditional IRA, Rollover IRA, SEP IRA, Simple IRA, but not 401k) as of 12/31 of the year of conversion
- Mega backdoor Roth Strategy
- Employer plan required
- $30,000-$50,000+ possible depending on plan design
- Only available if your company allows after-tax 401k contributions and either “in-service withdrawals” or “in-plan rollovers”
There are two ways to convert: inside your plan (in-plan conversion) or by rolling over to an external Roth IRA (in-service withdrawal). Your plan may offer one, both, or neither. We'll walk through each option below.
With either option, the Roth conversion step should happen as soon as possible so you can minimize the earnings that accumulate, and their tax impact.
It’s best to work with an experienced advisor who understands the strategy and knows the right questions to ask to make sure it is executed correctly.
How Much Can I Contribute?
Most employees are familiar with the normal $24,500 annual employee deferral limit. These contributions can generally be made either pre-tax or Roth (most plans now allow Roth contributions, although not all plans do). However, if your plan allows after-tax 401k contributions, you can contribute significantly more to the 401k, up to the IRC Section 415 limit, which is $72,000 for 2026 (plus the $8,000 “catch up” contribution if over 50 years old).
Note that this overall $72,000 limit takes into account both your employee deferral of $24,500, plus any employer matching or profit sharing contributions, which vary by employer. For example, if you contribute $24,500 in pre-tax employee deferrals, plus receive a $10,000 matching contribution from your employer, the maximum you can contribute in after-tax 401k contributions each year is $37,500 (if you are under 50).
Note that your plan may limit your after-tax 401k contributions to a lower amount or percentage due to the testing requirements of 401k plans.
Consider How This Strategy Fits With Other Financial Priorities
Financial decisions aren’t made in a vacuum. It’s important to consider how the mega backdoor strategy fits with your full financial picture.
Before considering the mega backdoor Roth: make sure you’ve already covered the financial planning essentials, like a liquid emergency fund or plan for unexpected expenses and the right insurance coverage. Also make sure that you’re already maximizing your current qualified plans, including regular 401k contributions (pre-tax and/or Roth depending on your tax situation), backdoor Roth (if possible), and your Health Savings Account (if eligible).
If you still have extra cash flow for long-term investment, you should compare the pros and cons of the mega backdoor Roth strategy to your other employer benefits, like Employee Stock Purchase Plans, Deferred Compensation arrangements, Flexible Spending Accounts, and more.
The mega backdoor Roth is a long-term strategy with potential taxes and withdrawal penalties, so it’s important to consider your other priorities and goals, like saving for your children’s education, saving for a home, or starting a business.
This Retirement Strategy May Not Always Be Available to You
If your employer offers after-tax 401k contributions, and you’re maxing out your other investments, then you may want to take advantage of the strategy while you can.
Most professionals change jobs several times during their career, and most employers currently do not offer this benefit. Even if you have access to this strategy today, you may not in the future.
There’s also a possibility that Congress gets rid of this “loophole” in future tax legislation with little warning.
Just don’t leave potential tax-free growth on the table if this strategy works for you. A $40,000 contribution today has decades to compound tax-free. If you wait five years, and you've missed out on $200,000+ in contributions.
The mega backdoor Roth isn't for everyone. But if you have access to it, understand how it works, and have the cash flow to take advantage of it, it can be an extremely powerful wealth-building tool.
How to Set Up Your Mega Backdoor Roth Strategy
Step 1: Check If Your Plan Allows After-Tax Contributions
Ask your human resources department or read your 401k Plan’s “Summary Plan Description” document to see if it offers after-tax 401k contributions. Look for a few key phrases:
- "After-tax 401k contributions" (required for the strategy) and "in-plan Roth conversions" (which automates Roth conversions within your 401k)
- Or "after-tax 401k contributions" (required for the strategy) and "in-service withdrawals" (allows rolling money out of the plan to an external Roth IRA while still employed)
If the language is confusing, inaccessible, or you just want to double-check, your financial advisor can help you.
Step 2: Set Your Contribution Amount and Conversion Frequency
You can adjust your after-tax 401k contributions anytime through your plan website — not just during open enrollment. You'll set it as a percentage of your paycheck, up to whatever limit your employer sets. The goal is to get closer to that $72,000 annual limit when you add up all contributions: your pre-tax, employer match, and after-tax amounts.
Once you make your after-tax 401k contribution election, you then need to consider how you’re going to convert the after-tax funds to Roth, depending on what your 401k plan allows.
Path A: In-Plan Conversion (Ideally Automatic)
If your plan offers in-plan Roth conversions, see if there’s an option to make the conversion from after-tax 401k contributions to Roth 401k automatic. If it can’t be automated, make a note to log into your 401k periodically to convert as soon as possible after your after-tax 401k contributions are made.
It’s important to put the note in a place you’ll see it and remember to take action. How you actually execute the in-plan conversion varies by plan and custodian, so you should contact your 401k administrator for help with the process.
Path B: In-Service Withdrawal to External Roth IRA
If your plan doesn't offer in-plan conversions but allows in-service withdrawals, you'll roll your after-tax contributions to an external Roth IRA.
Open a Roth IRA first if you don't have one, since funds transfer directly to the custodian. Request a direct rollover of after-tax contributions only—not pre-tax money unless you intend to convert your entire balance.
Since this is manual, you could accumulate contributions for a few pay cycles and convert 1-2 times per year. Just don't wait too long—earnings are taxable on conversion. Check if your plan limits the number of annual in-service withdrawals.
Additional consideration: Some plans let you split the rollover: move just your contributions to a Roth IRA (tax-free) while leaving the earnings in your 401k (tax-deferred). This minimizes your immediate tax bill. But many plans require earnings to follow contributions, meaning you'll owe taxes on any growth when you roll over to a Roth IRA.
Timing the Mega Backdoor Roth Strategy with Variable Compensation: Bonuses, Commission, RSU Vests, and More
If much of your income is variable — for instance, due to bonuses or RSUs — the mega backdoor Roth might feel risky since it reduces the amount on your regular paycheck. But with some budget planning, it's manageable.
Two approaches:
Fund from variable income: Many plans let you set different contribution rates for bonuses versus base salary. You could funnel variable income into after-tax contributions while keeping your regular paycheck intact. Check your plan's rules — some cap the percentage you can contribute from either source.
Supplement with other assets: Make aggressive paycheck contributions, then use your bonus, existing savings, or RSU sales to replenish your checking account throughout the year. This lets you max out the strategy without month-to-month cash flow strain.
For strategies on managing RSU vests and equity compensation timing, check out our Manual on RSUs.
Step 3: Make Sure Your Conversions Are Actually Happening (and Documented)
Conversion is key. If you make after-tax 401k contributions but do not convert, or the conversion is not executed correctly, you are building a significant tax liability for the future, possibly at a higher tax rate than if you had just invested the funds outside of your 401k plan.
Review your retirement accounts to make sure the conversions were executed and documented correctly. If you notice any errors, contact your 401k administrator immediately to fix the situation.
Step 4: Make Sure Your Roth Funds Are Invested Appropriately
The final step after the conversions are completed is to make sure the Roth accounts are invested appropriately. Since Roth money grows tax-free, consider investing it more aggressively than you might in a taxable account. This is where higher-risk, higher-return strategies make the most sense.
Budget for taxes on any growth that occurred before conversion. You'll owe these taxes when you file your return, or sooner through quarterly estimated payments if you're required to make them.
Grow Your Wealth with Additional Annual Roth Capacity
After kickstarting your mega backdoor Roth strategy, you can contribute significant additional funds into a Roth account. Over decades, these can grow and become hundreds of thousands — sometimes millions — in additional tax-free funds.
Involve your advisor early to understand your options and create a thoughtful strategy built for your full financial picture.
A great financial advisor will help you determine whether you’re eligible for this strategy according to your life goals and full financial picture. They’ll walk you through the logistics to make sure conversions happen systematically and correctly — and to avoid common pitfalls along the way.
FAQs
How is a mega backdoor Roth different from a regular backdoor Roth IRA?
A mega backdoor Roth is done through your employer's 401k plan and allows you to contribute $30,000-$50,000+ annually, while a regular backdoor Roth IRA is done through individual accounts and is limited to $7,500 ($8,600 if you’re over 50). The mega backdoor requires your employer plan to allow after-tax 401k contributions and either in-plan conversions or in-service withdrawals. The backdoor Roth IRA works for anyone.
What happens if I make after-tax 401k contributions but forget to convert them to Roth?
This can result in significant tax liability. The earnings on your after-tax contributions will grow tax-deferred (not tax-free), and when you eventually convert them, all the accumulated earnings will be taxable at ordinary income rates.
Can I do this strategy even if my income varies significantly throughout the year?
Yes, you can structure the strategy to work with variable income like bonuses, commissions, or RSU vests. Many plans allow you to set different contribution rates for variable compensation than for base salary.