By Dr. Jim Dahle, WCI Founder
What a Mega Roth Conversion Is
The Mega Roth Conversion, also known as 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 and 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 $69,000 . That's a lot more than the $7,000  that can be contributed to a Roth IRA for thse 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, 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 $69,000  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.
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 are already able to max out [$69,000 in 2024] the 401(k)/403(b) with employee/employer pre-tax contributions and 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 if applicable, 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, then you should continue on to the next step.
Next, read your 401(k)/403(b) plan document or go 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 2024, that's $69,000. Next, subtract out the employee contribution you have made for the year. Perhaps $23,000. That leaves you with $46,000. Now, subtract out any employer matching or profit-sharing contributions made on your behalf. Perhaps that is another $10,000. That leaves you with $36,000 you can contribute to the 401(k)/403(b) as an after-tax contribution. This all assumes, of course, that you made more than $69,000 from this employer. You cannot contribute more than you earned.
Now, contribute $36,000 to your 401(k). You'll likely need to talk to HR to do this. The easiest way is to just write a check to them. 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 don'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 and 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, but 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.
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Why You Should Do a Mega Roth Conversion
When investing for retirement, it is almost always better to invest in a retirement account rather than a taxable investing account, even if you are planning to retire early. Estate planning is easier, 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!
What If You're the Boss?
If you are the practice owner, or 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, then 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 Vanguard, 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? Comment below!