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Mega Backdoor Roth: Your $66k Roth Tax Loophole

Mega Backdoor Roth: Your $66k Roth Tax Loophole

The Mega Backdoor Roth is a tax loophole that many affluent individuals take advantage of to put $66,000 into a Roth. If you are familiar with Roth IRAs, you know they are limited to only $6,500 a year in contributions ($7,500 if you’re over 50 years old) and they have income phase-outs. With the Mega Backdoor Roth, you can blow past this amount with no income limitations. The good news is that, while they are still allowed, anyone can implement this strategy with the right employer-sponsored retirement plan like a 401k. Let’s see how they work.

Mega Backdoor Roth Eligibility

To use the Mega Backdoor Roth strategy, your employer-sponsored plan must allow you to:

  • Make After-Tax Contributions
  • Make in-service conversions or distributions

If your employer-sponsored plan doesn’t allow for both, then you won’t be able to implement the Mega Backdoor Roth strategy.

Pre-Tax – Roth – After-Tax

To better understand the Mega Backdoor Roth strategy, you first need to understand the three main contribution types that you can make to an employer-sponsored plan. They are:


These are dollars you put into your 401k that you don’t pay taxes on. This is the most common 401k election. You deduct a certain amount from your paychecks, you receive a tax deduction for that amount, and the money goes into your 401k with no taxes taken out.


These are dollars you put into your 401k that you paid taxes on. By electing to pay taxes on that money, you can take out the money tax-free. Because the account is a Roth 401k, any earnings also grow tax-free.


I am going to highlight this option because this is one that most people are unaware of. After-tax contributions are dollars that go into your 401k that you pay taxes on like your Roth. Here is the big difference: That money does not grow tax-free. Your after-tax earnings grow tax-deferred. This means that, as the money grows, there is no tax owed. However, when you eventually take the earnings out, you will pay taxes at that time.

The reason why after-tax contributions are relatively unknown is that not all 401k plans even allow you to make after-tax contributions. Below is an example of a real plan that allows for after-tax contributions:

Mega Backdoor Roth Contributions

Contribution Limits

Now that you understand the contribution types, now you need to understand contribution limits.

  • Roth and pre-tax personal contributions are subject to a limit of $22,500 in 2023.
  • Your employer can match your contributions or contribute a certain amount of your income to your 401k. When factoring in these contributions and your personal contributions, you can put up to $66,000 in a 401k.
  • Note: After-tax contributions are not subject to the personal limit of $22,500. For example, let’s say you put in $22,500 of pre-tax or Roth dollars in your 401k and your employer puts in $5,000. This means that you could put in $38,500 in after-tax dollars to hit the limit of $66,000.

Mega Backdoor Roth


Now that you understand contribution limits and contribution types, let’s go over how to execute the Mega Backdoor Roth. So, let’s take the same example we discussed above:

  • $22,500 in personal 401k contributions
  • $5,000 in employer contributions
  • $38,500 in after-tax contributions that you are making.

We are halfway to making the Mega Backdoor Roth conversion. The final step is choosing to do an in-service conversion or distribution of the after-tax contributions to a Roth 401k. By doing this, you will now have $38,500 in Roth 401k money. This money will grow tax-free and will come out tax-free in the future, too.

The Final Step in Your Mega Backdoor Roth Conversion

To take it a step further, let’s discuss how you can execute the Mega Backdoor Roth conversion and get the full 401k max of $66,000 into a Roth account. In the example we’ve been using, here’s a way you could do it:

  • For your personal contributions, elect to make Roth 401k contributions.
  • Convert your after-tax contributions to Roth.
  • Convert your employer contributions to Roth.

Mega Backdoor Roth Tax Considerations 

There is now a total of $66,000 in the Roth 401k. The Roth 401k personal contributions and after-tax contributions had no additional tax liability when the conversion happened since you already paid taxes on these dollars. However, be aware that when employers match, they use pre-tax dollars. If you have a pre-tax match, you will owe taxes on that conversion. Ideally, you’ll have cash in an outside account to cover the tax liability.

You also need to be aware of earnings on your after-tax contributions. For example, let’s say you have $25,000 in after-tax contributions, and that grows to $27,000. You will owe taxes on that growth of $2,000. To mitigate this risk, you will need to convert frequently. If your employer-sponsored plan enables the Mega Backdoor Roth, then there is often an option to set up automatic conversions.

If you have pre-tax personal contributions, you will need to pay taxes on that money first, before it converts over to a Roth.

Be Careful with Funding

If you are excited about the Mega Backdoor Roth strategy, take a step back for a moment. You will want to do some planning around your contributions and what your employer contributions are provided to you. For example:

  • You put in $22,500
  • Your employer matches 50% of your contributions for a total of $11,250
  • However, you already put in $40,000 in the after-tax contribution portion of your 401k
  • So, your employer can only give you $3,500 before you hit the max of $66,000 (Meaning you missed out on $7,750 in free money)

Should You Do a Mega Backdoor Roth?

The Mega Backdoor Roth is a highly scrutinized tax loophole that could be modified or even outlawed completely in the future. Because of this, you may feel like you need to rush and plan to see if you can finance the strategy. Before you make this decision:

  • Understand that a Mega Backdoor Roth can require significant amounts of capital. In our example here, you were putting away $61,000 of your own after-tax dollars into a Roth and converting and paying tax on your $5,000 employer match.
  • That is a lot of money, no matter who you are, and that is a lot of money going into an account that generally won’t be available without penalty until you’re 59.5.
  • If you are in your high-earning years and accumulating wealth, you want to consider all your savings buckets that you can put cash into like a brokerage account, not just retirement buckets.

While it’s still available, the Mega Backdoor Roth can be an incredibly powerful tool. Working with a financial planner to go over your plan structure and how to maximize the strategy can be highly beneficial. For example, If you are someone like a medical professional who has a 457 plan and a 401k plan, you can potentially do a Mega Backdoor Roth on both plans. This could mean well over $100,000 going to a Roth every year.

If you feel like having a comprehensive plan around how much to save and how to implement strategies like a Mega Backdoor Roth would benefit you, please reach out or schedule some time to learn more about MDRN Wealth.


Important Disclosures

MDRN Wealth LLC  does not provide specific legal or tax advice. Please consult with professionals in these areas for specific legal and tax recommendations. The information provided herein is general information. It is not intended to be construed as investment, tax, or legal advice. Information in this article is not an offer or solicitation to purchase, sell, or endorse a specific company, security, investment vehicle or strategy. Investing involves risk and the possible chance for loss of principal. Please consider your tolerance for risk before investing. Past performance is never guaranteed and future results can vary. Opinions conveyed by MDRN Wealth LLC cannot be viewed as an indicator of future performance and are subject to change. Results may vary. Use information at your own risk.

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