Retirement savers with access to a qualifying 401(k) plan may be able to significantly boost their tax-advantaged savings beyond standard contribution limits through a strategy known as the Mega Backdoor Roth, according to financial experts.
While traditional 401(k) plans typically cap employee contributions at 19, 2026, at $24,500, the Mega Backdoor Roth allows for contributions of up to $72,000, according to Dan LaRosa, Director of Corporate Retirement Plans at Ritholtz Wealth Management. This strategy involves making after-tax contributions to a 401(k) plan and then converting those funds to a Roth account.
“It uses the same type of strategy that you have in your regular backdoor Roth IRA,” LaRosa explained in a recent interview on the “At the Money” podcast with Barry Ritholtz. “That’s just the way for high earners to get money into a Roth account. They’re gonna make a non-deductible contribution to a traditional IRA and then convert that to a Roth IRA. It works, it’s great, but the dollar amount is pretty small, it’s $7,500.”
The appeal of the Mega Backdoor Roth lies in its potential for tax-free growth and withdrawals in retirement. Unlike traditional 401(k)s, where contributions are made pre-tax and withdrawals are taxed as income, Roth accounts offer tax-free withdrawals, provided certain conditions are met. The Mega Backdoor Roth essentially allows individuals to shelter a much larger portion of their retirement savings from future taxes.
However, the strategy isn’t universally available. The key requirement is that the employer’s 401(k) plan must permit both after-tax contributions and in-plan Roth conversions – or in-service distributions to an outside Roth IRA. LaRosa emphasized that the decision to offer this feature rests with the employer, and is often influenced by compliance testing requirements.
“The real challenge is just whether or not your plan allows you to use it,” LaRosa said. “It’s just the backdoor part that sounds kind of sketchy. It is not a gray area. It is not a loophole. It’s completely legit.”
The compliance testing LaRosa refers to ensures that the plan doesn’t disproportionately benefit highly compensated employees. If only a small group of high earners utilize the Mega Backdoor Roth, the plan could fail these tests, rendering the strategy ineffective. Broader participation across different income levels within the company is often necessary for the strategy to work.
For companies that do offer the Mega Backdoor Roth, the administrative burden is relatively minimal, according to LaRosa. While there may be some added complexity in plan design and compliance, the benefits for employees can outweigh these costs. “There is no additional cost,” he stated. “You could say there’s a little bit of an additional headache – you’re adding more complexity, another layer of compliance testing.”
The strategy is particularly well-suited for solo 401(k) plans, often used by self-employed individuals and small business owners. In these cases, the compliance testing hurdles are eliminated, making the Mega Backdoor Roth a straightforward way to maximize retirement savings. According to LaRosa, a business owner could potentially contribute up to $76,000 per year and, with a 12% return, accumulate over $1 million in just 7.5 years.
The timing of conversions is also a factor. Some plans allow for daily automatic Roth conversions, while others may limit conversions to a specific frequency. LaRosa recommends that employees work with their 401(k) provider to understand the plan’s rules and ensure that conversions are executed correctly.
While the Mega Backdoor Roth offers significant tax advantages, it’s not without its limitations. Funds converted to a Roth 401(k) are generally subject to the same withdrawal rules as traditional 401(k)s, meaning access to the funds may be restricted before age 59 ½. However, recent legislation, the SECURE 2.0 Act, has removed required minimum distribution (RMD) requirements from Roth 401(k)s, offering greater flexibility in retirement.
For high-income earners seeking to maximize their retirement savings and minimize their tax burden, the Mega Backdoor Roth presents a powerful, and legitimate, financial planning tool – provided their employer’s plan allows it.
