By Dr. Jim Dahle, WCI FounderThe Mega Backdoor Roth IRA has nothing to do with an IRA, much less the Backdoor Roth IRA process, but it's still a great way to invest in your Roth 401(k) instead of a taxable account.
What a Mega Roth Conversion Is
The Mega Roth conversion, aka a Mega Backdoor Roth IRA, is a two-step process allowed in some 401(k)s and 403(b)s. The first step is to make an after-tax contribution to your 401(k). Note that your 401(k) may not allow this. Also note that this is different from a Roth contribution, and some HR personnel may not understand that. There are three kinds of contributions that the IRS allows to be made to a 401(k) or 403(b):
- Pre-tax (tax-deferred or traditional) contributions
- Roth (tax-free) contributions
- After-tax contributions
Despite the IRS allowing all three, many plans only allow the first or just the first and second types.
When you make pre-tax contributions, you get an immediate tax deduction equal to the contribution. It grows in a tax-protected manner, and then when you withdraw the money from the account, you pay taxes at ordinary income tax rates on both the contribution and any earnings. When you make Roth contributions, you do not get an immediate tax deduction, but it grows in a tax-protected manner. Then, when you withdraw the money from the account, there are no taxes paid on the contribution or its earnings. When you make after-tax contributions, you do not get an upfront tax deduction. The money grows in a tax-protected way, but when you withdraw the money, only the original contribution (basis) comes out tax-free. The earnings are fully taxable at your marginal ordinary income tax rate. This is obviously less than ideal and dramatically inferior to Roth contributions. In fact, it is so inferior that it often doesn't make sense to do this instead of investing in a taxable account if this is the only step of the process that you are allowed to do.
The second step of a Mega Roth conversion is to move that after-tax contribution into a Roth account (i.e., a Roth conversion)—either the Roth subaccount of the 401(k) or 403(b) or withdrawing the money from the 401(k)/403(b) altogether and moving it into a Roth IRA. Note that some 401(k)/403(b)s do not allow this step either. It's possible that your plan may only allow one of the two steps or even neither of them. Once that money is moved into a Roth account, it acts just as if it was a Roth contribution in the first place. It will grow in a tax-protected way and neither the contribution nor the earnings will be taxable at withdrawal. These contributions can be as high as $70,000 [2025]. That's a lot more than the $7,000 [2025] that can be contributed to a Roth IRA for those under 50—thus the reason it is called a “Mega” Backdoor Roth IRA or “Mega” conversion. The conversion itself is tax-free because the money being converted was already taxed; remember, it was an after-tax contribution. Unlike the Backdoor Roth IRA process, there is no pro-rata rule involved in these conversions, and Form 8606 is not used to report it.
Who Should Consider a Mega Roth Conversion
If you are currently investing in a taxable account, but . . .
- Would prefer the tax advantages and asset protection advantages of investing in a tax-protected account, and
- Are not currently putting $70,000 [2025] into your 401(k)/403(b) via employee and employer (matching or profit-sharing) contributions because the employer does not put enough in or you've already used your employee contribution in another 401(k) or 403(b), and
- Have a 401(k) or 403(b) that allows after-tax contributions, and
- Have a 401(k) that allows in-plan conversions or non-hardship in-service withdrawals,
. . . you should do a Mega Roth conversion.
More information here:
Comparing 14 Types of Retirement Accounts
Who Should Not Do a Mega Roth Conversion
There are a number of reasons why you might not bother with a Mega Roth conversion. If any of the following is true, don't bother.
- You wish to invest in something that your 401(k)/403(b) will not allow you to invest in (gold, Bitcoin, private investments, investment property, and individual stocks are often not allowed in many employer-provided retirement accounts).
- Your 401(k)/403(b) does not allow after-tax contributions.
- Your 401(k)/403(b) does not allow in-plan conversions or non-hardship in-service withdrawals.
- You already can max out your 401(k)/403(b) with employee/employer pre-tax contributions, and you would prefer pre-tax contributions to Roth contributions (most people in their peak earnings years).
- You are not able to save enough money for retirement to invest beyond your Roth IRA, 401(k)/403(b) employee contribution, and any 401(k)/403(b) employer matching dollars.
How to Do a Mega Roth Conversion
First, consider your current retirement savings amount and available options. If you are already doing or cannot do a Backdoor Roth IRA for yourself and your spouse, you are already maxing out your employee contribution to your 401(k)/403(b), and are now investing money in a taxable account, you can continue to the next step.
Next, read your 401(k)/403(b) plan document or talk to your HR specialist. Ask them if the plan allows after-tax contributions. If the answer is yes, ask them if they allow in-plan conversions. If the answer is yes, wonderful, you're done asking questions. If the answer is no, ask if they allow in-service withdrawals without any sort of hardship. If the answer to this is yes, you can still do a Mega Roth conversion.
Next, calculate the maximum amount of an after-tax contribution. First, take the 415(c) limit for the year. In 2025, that's $70,000. Next, subtract the employee contribution you have made for the year. Perhaps it's $23,500. That leaves you with $45,500. Now, subtract out any employer matching or profit-sharing contributions made on your behalf. Perhaps that is another $10,000. That leaves you with $35,500 you can contribute to the 401(k)/403(b) as an after-tax contribution. This all assumes, of course, that you made more than $70,000 from this employer. You cannot contribute more than you earned.
Now, contribute $35,500 to your 401(k). You'll likely need to talk to HR to do this. The easiest way is to just write a check. It may also be possible to have the money pulled directly from your paycheck(s). It is definitely easier to do this all at once, a single time in a given year, so push to just write them a check whenever possible. This should go into an “after-tax” subaccount of your 401(k). Note that this is NOT the Roth subaccount.
Finally, move the money from the after-tax subaccount to the Roth subaccount. If you cannot do this online (and you shouldn't expect to), you will need to either talk to HR or, more likely, the 401(k)/403(b) custodian (such as Fidelity or Schwab) to get it done. It is a simple account transfer, but is a “taxable event.” It just so happens that the tax bill from the “taxable event” is zero, at least if you do it right away after the contribution. If you let the money go into an investment or leave it sitting in the after-tax account for a long time between the contribution and the conversion, you may have a gain or even a loss. You really don't want either. So, do the conversion step right away after the contribution step.
If your plan does not allow in-plan conversions (by far the more common option) but does allow in-service withdrawals, then withdraw the money directly into a Roth IRA. Once the money is in the Roth account, you may invest it according to your written investing plan. If you don't have one of those, consider taking our Fire Your Financial Advisor online course to help you write one. It has a one-week, no-questions-asked, money-back guarantee, and there is even a version that provides CME and dental CE.
How Do You Report a Mega Roth Conversion on Your Taxes?
You will receive a 1099-R from your 401(k)/403(b) provider that will detail what happened. It should have the amount of the conversion in Box 1. Either the amount in Box 2 should be $0, or “Taxable amount not determined” should be checked in Box 2b. The amount of the conversion will show up on line 5a of your Form 1040 but the amount on line 5b, the taxable amount, should be zero.
If you need step-by-step instructions in TurboTax, Harry Sit is the man.
Why You Should Do a Mega Roth Conversion
When investing for retirement, it is almost always better to invest in a retirement account instead of a taxable investing account, even if you are planning to retire early. Estate planning is easier and asset protection is dramatically better, and your money will grow in a tax-protected way, i.e. faster without the tax drag of a taxable account.
For example, let's consider someone who invested $30,000 for 30 years via a Mega Roth conversion rather than in a taxable account. If this person was in the 23.8% qualified dividend/long-term capital gains bracket and invested in the same tax-efficient total stock market fund earning 8% per year and yielding 2% per year in both accounts, it would grow to perhaps $215,000 after-tax in the taxable account. But in the Roth account, it would grow to $302,000, 41% more! That's the value of that tax-free growth.
More information here:
Mega Backdoor Roth Contributions with Minimal 1099 Income
What If You're the Boss?
If you are the practice owner or if you can influence the selection of retirement plans, then get a great 401(k) that allows for the Mega Backdoor Roth IRA conversion process. Our recommended retirement account providers can be found here. If you are an independent contractor or otherwise have no non-spousal employees, you can use a customized/self-directed individual 401(k) (available at the same link). While these customized individual 401(k)s are not free like the “cookie-cutter” ones from Fidelity or Schwab, they will allow for after-tax contributions and in-plan conversions. They will also allow for investments only available in self-directed accounts—like private real estate funds, precious metals, or cryptoassets if you're interested in those sorts of things.
As you can see, a Mega Roth conversion has nothing to do with an IRA or even the Backdoor Roth IRA process (although both involve a non-deductible contribution and a tax-free Roth conversion). It is also different from just a Roth conversion (which usually comes with a tax bill). It is instead an excellent way to invest in a Roth 401(k)/403(b) instead of a taxable account.
What do you think? Do you do Mega Roth conversions each year? Why or why not? How much do you convert?
I am self-employed and over 70, with an Individual 401(k) Plan at Schwab. I added a Roth 401(k) account to the Plan last year when Schwab offered that option. Schwab recently allowed for after-tax contributions to its Individual 401(k) plans, but still does not allow for in-plan conversions. I had assumed that this meant that I could not do a Mega Backdoor Conversion. The article, however, suggests that I might be able to withdraw money directly into a Roth IRA if the plan allows for in-service withdrawals. Since I am over 59 and can withdraw from my 401(k) without penalty regardless of whether I am still working, does this mean that I can do a Mega Backdoor Roth conversion by simply withdrawing my after-tax contributions to my Individual 401(k) into a Roth IRA?
Maybe. Why not ask and report back? A withdrawal and a rollover are not the same thing though, so the answer may still be no. You can get a customized plan and do this if you really want to though.
If I’m the employer and I want to have the ability to contribute to a Mega Backdoor Roth IRA, would I have to contribute for my employees as well?
There’s a very good chance you would to pass non discrimination testing.
This will almost never work with non-highly compensated employees. MBR 401k is best used in plans where there are only partners or other highly compensated employees.
Do I need to subtract the following as well from 415(c) amount to find the limit for Mega Back door contribution ?
1. My 403(B)
2. My 457
3. 529
4. Spouse’s 401 K
5. Spouse’s 457
6. Spouse’s 403 B.
7 . Spouse’s mega back door Roth IRA
1. Yes
2. No
3. No
4. No
5. No
6. No
7. No
Thanks for all you do! I’m not sure if you can answer this, but my practice has this option (they nixed profit sharing a year ago and put this in place as a substitute, which in my opinion is not ideal). However, they have stated that the plan has to pass nondiscrimination testing. We are a large group with 150 docs and many nonphysician employees (well over 1000) who are considered non-HCE. If we do not pass such testing, we were told that the “after tax” money would be returned to us (or at least a portion of this). I’m hesitant to contribute as it seems like it could be a large pain if I invest this money, convert to Roth, invest it, and then something short-term happens in the market and I suffer a large loss that can not be overcome by patience. Would you think this would still be a good option for me? Are the nondiscrimination rules hard to pass (they seem somewhat murky to me as to what constitutes “discrimination” rules for these types of plans?
I’d still use it to the extent allowed by the plan even if it means some money gets returned to you and you have to invest it in taxable. If the market drops, you’ll have the same loss in taxable or in Roth. Same same. That’s a non issue to this decision. If you’re really worried about that, I guess leave it in cash for a year until you know if some will have to be withdrawn due to non discrimination testing.
Yes, the rules are very complex. Complex enough to seem murky to most of us, including me. But your best bet is to talk all those non-HCEs into contributing to their 401(k)s. The more they put into the account the more you can put into the account.
My advice would be to reach out to your plan administrators and to request the results of prior year’s testing. Ask them if you contributed $X, how much of that would have been returned to you? If the answer is everything (or close to it), then don’t bother.
My retirement account through work (W2) is separate 403b and 401a that are combined to be called the Baptist Health Retirement Savings Plan. $23.5K employee with $11.75K match(50%). Since each 403b and 401a have individual $70K limits, I have $140K to work with. Subtract the $23.5K employee and $11.75K match and I can contribute $104,750 in 2025 after tax and in-plan convert all to Roth. This has been termed the ULTRA MEGA BACKDOOR ROTH Conversion. This is my first year doin this but have been told it will work. See any problems with doing this?
I am checking on this now. I have a solo 401k with E*trade with a Roth 401k also. I also have a PDB plan with Schwab. I max my 401k, this year $34,750 including increased catch up. Schwab tells me I can only put in 6% of W2 income (I have S Corp) as employer contribution. Does this limit also affect a mega back door Roth? And even the retirement staff at E*trade are struggling to answer my question about after tax contributions to my 401k.
You are indeed limited to 6% PS with a Cash Balance plan. And yes, you are able to do MBR 401k for the difference. However, not with Schwab or E trade. For that you will need to have a custom-designed solo 401k plan with a plan document that allows after-tax contributions and in-plan Roth conversions (or if you don’t have a TPA, that would be rollovers to a Roth IRA).
Great post as always Jim. Quick ? with regards to:
“Now, subtract out any employer matching or profit-sharing contributions made on your behalf. Perhaps that is another $10,000. That leaves you with $35,500 you can contribute to the 401(k)/403(b) as an after-tax contribution.”
I’ve confirmed my plan allows for after tax contributions and in plan Roth conversions. I just emailed our bookkeeper about profit sharing and employer matching. My fear is that the match and profit sharing get me to the 70k max.
I am an owner in an orthopedic practice in the northeast: wouldn’t most practice owners want to make the match/profit sharing get as close to the 70k allowable to maximize the benefit to the owners? Hoping I have some room for after tax contributions but not sure I will. Thanks for all you do!
Regards,
Jeff
Sure, so long as it doesn’t cause problems with the non-discrimination testing.
If you are in the highest tax brackets, tax deferral is best, however there are situations where you might want some Roth contributions, especially if you know that your retirement brackets will be at least as high as they are now, but that’s not very common. You can already do Roth via Roth salary deferrals up to $23,500. If you have the ability to max out profit sharing via pre-tax, then I would consider just doing that and also doing Roth salary deferrals. If you have any NHCE employees, you are never going to be able to make after-tax contributions that pass testing:
https://www.whitecoatinvestor.com/mega-backdoor-roth-with-erisa-401k-plans/
If your practice is partner-only with no NHCEs, then the same reasoning would apply as above. The only time you might want to use MBR option on top of PS in a partner-only practice is when adding a Cash Balance plan, in which case if it is a smaller practice (<25 participants) you would be limited to 6% profit sharing.
If i have money in other taxable accounts or other pre tax401k (ie from a prior employer) does any of that need to be taken into account? Any pro rata rules? I currently have a fair amount of pretax money in this 401k
I have a 35K balance in my after tax section of 401k. I was too lazy/confused to do the in plan conversion until now. I’m not sure exactly how much of this is gains vs contributions, but I’d estimate maybe 5-7k in gains. If I just convert the whole thing to Roth 401k now, am I correct that just the gains will be taxed? Will that be at a long-term capital gains rate or ordinary income rate?
Yes.
Ordinary income tax rates.
The plan has kept track of the basis for you. So just ask what it is.
My University plan does not allow for any after-tax contributions after confirming with HR and Fidelity. I did receive a strong opinionated response from the benefits team after requesting that this be added to the plan in the future – thought you would enjoy reading it!
“The Mega Backdoor Roth is inconsistent with tax policy, and how Roth retirement plans are intended to be utilized.
The University is unaware of any other higher education institution that offers this option and deems this an inconsistent practice with how we are supposed to administer and offer our retirement plans. So, we won’t be offering it. The federal government is considering eliminating this option because it circumvents the intended use of Roth plans. It is deemed an inappropriate strategy to engage in tax minimization that exists in a gray area that requires strict compliance to stay within legal and regulatory bounds.”
Uhhh…seems a little strong, but thanks for sharing. If you can’t talk them into it, you can’t have it without changing jobs.