Mega Backdoor Roth via 401(k)

What the Mega Backdoor Roth Accomplishes

The mega backdoor Roth allows high earners to contribute up to $46,000 extra to Roth accounts annually by exploiting a gap between the standard 401(k) employee contribution limit ($23,000 in 2024) and the total 401(k) contribution limit ($69,000 in 2024). This strategy converts after-tax 401(k) contributions into Roth funds, where they grow and withdraw tax-free forever.

For an investor in the 32% federal tax bracket contributing $40,000 annually via mega backdoor Roth for 20 years at 7% returns, the strategy produces $1,640,000 in tax-free wealth. The same amount in a taxable account would generate approximately $1,148,000 after taxes on dividends and capital gains.

The contribution hierarchy:

1. Pre-tax/Roth 401(k) employee contributions: $23,000 limit (2024)
2. Employer match: Variable (typically 3-6% of salary)
3. After-tax employee contributions: Fills remaining space up to $69,000 total
4. In-plan Roth conversion: Converts after-tax contributions to Roth

The 2024 Contribution Limits Breakdown

Understanding the exact limits prevents contribution errors that trigger excess contribution penalties:

Calculation example for $200,000 salary:

• Employee pre-tax contribution: $23,000
• Employer match (4%): $8,000
• Available for after-tax: $69,000 - $23,000 - $8,000 = $38,000

The after-tax contribution capacity varies by salary and employer match. Higher employer matches reduce available after-tax space.

Source: IRS Notice 2023-75, IRC Section 415(c).

Three Eligibility Requirements Your Plan Must Meet

Not all 401(k) plans permit mega backdoor Roth contributions. Your plan must satisfy three requirements:

Requirement 1: After-tax contribution acceptance

The plan document must explicitly allow employees to make after-tax (non-Roth) contributions beyond the standard $23,000 limit. According to the Plan Sponsor Council of America, approximately 21% of plans with 5,000+ participants offer this feature. Smaller employers rarely do.

Verification step: Contact your HR or benefits department and ask: "Does our 401(k) plan accept after-tax contributions separate from Roth contributions?"

Requirement 2: In-plan Roth conversions OR in-service distributions

The plan must permit one of two mechanisms to move after-tax funds into Roth status:

• In-plan Roth conversion (preferred): Converts after-tax balance directly to the plan's Roth 401(k) account without leaving the plan. This is cleaner for record-keeping and allows unlimited conversions.

• In-service distribution to Roth IRA: Allows distribution of after-tax contributions to an external Roth IRA while still employed. Some plans restrict this option to age 59.5 or older.

Requirement 3: Immediate or frequent conversion timing

The optimal approach converts after-tax contributions immediately (within days) before any earnings accumulate. Plans that restrict conversions to quarterly or annual windows create tax complications because earnings on after-tax contributions are taxable upon conversion.

The earnings problem: If you contribute $10,000 after-tax and it grows to $10,500 before conversion, the $500 gain becomes taxable income in the year of conversion. Immediate conversion eliminates this issue.

How the Conversion Mechanics Work

The execution requires understanding the distinction between contribution types within your 401(k):

Step 1: Maximize standard contributions first

Contribute the full $23,000 pre-tax or Roth employee limit before initiating after-tax contributions. Some plans require this; others allow concurrent contributions.

Step 2: Elect after-tax contributions

Set up after-tax contributions through your payroll system. This is a separate election from your pre-tax/Roth percentage. Specify either a percentage of pay or fixed dollar amount per paycheck.

Step 3: Execute conversion immediately

If your plan offers automatic in-plan Roth conversions, enable this feature. The plan will automatically convert each after-tax contribution to Roth upon receipt.

If automatic conversion is unavailable, manually request conversion through your plan administrator (Fidelity, Vanguard, Schwab, etc.) immediately after each contribution posts.

Step 4: Track basis carefully

Your after-tax contributions represent basis (already-taxed money). Only earnings on those contributions are taxable upon conversion. Maintain records showing:

• Date of each after-tax contribution
• Amount contributed
• Date converted to Roth
• Any earnings at time of conversion

Source: IRS Notice 2014-54 clarified the ordering rules for converting after-tax 401(k) contributions.

Worked Example: $250,000 Salary, 6% Employer Match

Inputs:

• Salary: $250,000
• Employer match: 6% of salary = $15,000
• Employee pre-tax contribution: $23,000
• Age: 45 (no catch-up)
• Total 401(k) limit: $69,000

Calculation:

Total contribution space: $69,000 Less: Employee pre-tax: -$23,000 Less: Employer match: -$15,000 Available for after-tax: $31,000

Monthly execution:

After-tax contribution per paycheck (24 pay periods): $31,000 / 24 = $1,291.67

Tax treatment of conversion:

If converted immediately with no earnings:

• Taxable amount: $0
• Roth basis established: $31,000

If converted quarterly with $300 earnings accumulated:

• Taxable amount: $300 (ordinary income)
• Roth basis: $31,000 (original contributions)
• Roth earnings: $300 (tax-free going forward)

20-year projection at 7% annual return:

Annual mega backdoor contribution: $31,000 After 20 years with no further contribution increases: $1,270,000 in tax-free Roth assets

Federal tax savings compared to taxable account (assuming 20% effective rate on investment gains): approximately $254,000

Common Pitfalls to Avoid

Pitfall 1: Confusing after-tax with Roth contributions

After-tax contributions are NOT the same as Roth 401(k) contributions. The $23,000 limit applies to combined pre-tax and Roth 401(k) contributions. After-tax contributions are a third category that fills the gap to $69,000.

Consequence: Contributing $46,000 as "Roth" (impossible) versus $23,000 Roth + $23,000 after-tax (correct if space permits) creates failed contribution attempts or excess contribution penalties.

Pitfall 2: Delaying conversions

Waiting months to convert after-tax contributions allows earnings to accumulate. Those earnings become taxable ordinary income upon conversion.

Example: $30,000 after-tax contribution held 6 months with 5% gain = $750 taxable income. Immediate conversion: $0 taxable income.

Pitfall 3: Forgetting to adjust for employer contributions

Employer matches count toward the $69,000 limit. A generous 10% match on $250,000 salary = $25,000, leaving only $21,000 for after-tax contributions after the $23,000 employee limit.

Pitfall 4: Plan doesn't permit in-service distributions

Some plans allow after-tax contributions but only permit conversion upon separation from employment. This eliminates the benefit for current employees because years of earnings will be taxable upon eventual conversion.

Verification: Ask your plan administrator: "Can I convert after-tax contributions to Roth while still employed, or only after leaving the company?"

Pitfall 5: Violating the pro-rata rule (for rollovers to IRA)

If you roll after-tax 401(k) funds to an IRA instead of converting in-plan, the IRS pro-rata rule may apply across your total IRA balances, potentially creating unexpected taxes.

Solution: Use in-plan Roth conversion (keeps funds in 401(k)) rather than rollover to Roth IRA whenever possible.

Implementation Checklist

Before Starting

• Confirm plan accepts after-tax contributions (contact HR)
• Verify in-plan Roth conversion is permitted
• Check if automatic conversions are available
• Calculate your personal after-tax contribution capacity
• Confirm you can afford contributions (this is in addition to standard 401(k))

Execution Steps

• Max out $23,000 pre-tax or Roth contribution first
• Set up after-tax contribution percentage or dollar amount
• Enable automatic Roth conversion if available
• If no automatic option, set calendar reminders to manually convert after each pay period
• Keep records of contribution dates and amounts

Annual Review

• Recalculate available after-tax space if salary or match changes
• Verify total contributions stayed below $69,000 (or $76,500 if 50+)
• Confirm all conversions completed with minimal earnings
• Update beneficiary designations on Roth 401(k) account

The mega backdoor Roth represents the largest legal Roth contribution opportunity available to high-income earners. The strategy requires a cooperative employer plan and immediate conversion execution, but the decades of tax-free growth justify the administrative complexity for investors who can afford contributions beyond the standard limits.