What is a Mega Backdoor Roth Conversion?
At The Financial Cocktail, we are all about tax-advantaged accounts. Why not take the path of least resistance? The Mega Backdoor Roth Conversion is a way to increase Roth dollars utilizing a 401(k) or 403(b) plan. Know these accounts can be used interchangeably.
Allow me to start by saying, about 90% of retirement plans do not have the necessary structure or do not allow the movement of funds required by the Mega Backdoor Roth process. This eliminates the option to perform a Mega Backdoor Roth Conversion for many of you. I have a detailed walkthrough of all Roth conversions, including the Mega Backdoor Roth, on my course found here.
There are three areas of contribution within a 401(k) plan:
Pre-Tax (Traditional) Contributions
Post-Tax (Roth) Contributions
After-Tax Contributions
Most plans only allow for pre-tax contributions. Pre-tax meaning contributions are made before deductions are withheld . Taxation occurs during withdrawal.
Roth contributions are made with post-tax dollars. Account growth is tax-exempt upon withdrawal. Expensive up front, but a nice haven for those with a high savings rate.
After-tax contributions are pretty terrible. This account is funded with post-tax contributions. The account grows tax-protected, but upon withdrawal, only the original post-tax contribution is tax exempt. You already paid the taxes on the contributions, so this account is pretty worthless because it has no advantage. Yet it still has the restrictions of a retirement account.
From my understanding, it’s more costly for the employer to offer more retirement options to employees, so just a traditional 401(k) it is. The self-employed crowd will have access to all three for a manageable fee. It may require the use of a third party host such as mysolo401(k).
Mrs. TFC and I use mysolo401(k). We each have a traditional, Roth, and after-tax non-prototype account housed with Fidelity. Six solo401(k) accounts total. No sponsorship. It’s just what we do.
How it Works:
The 415(c)-contribution limit for 401(k)s in 2025 is $23,500 for employEEs and $46,500 for employERs -- $70,000 total per person. Those qualifying for catch-up contributions, such contributions can not be applied to after-tax contributions. Throw those directly into the traditional or Roth pot.
Most W-2 CRNAs will have $23,500 contributed to a pretax 401(k) from biweekly payroll. Assuming a 3% employER match on a $250,000 salary, the employER would contribute $7,500 to a pretax 401(k). This brings the total 401(k) contributions to $31,000.
The 415(c) total of $70,000 - $31,000 = $39,000 Remaining
Speak with HR and the benefits team to ensure your retirement provider allows for after-tax contributions AND a conversion.
If allowed, contribute up to $39,000 to an after-tax account. This money comes from your personal bank account. These are after-tax dollars. It’s easiest to write a single check.
Now you have a total of $31,000 in a pretax 401(k) and $39,000 in an after-tax 401(k). Because after-tax accounts are worthless, transfer funds from the after-tax 401(k) to the Roth 401(k). Post-tax dollars from one post-tax account to another.
If your retirement provider allows a conversion, they will likely want your transfer to end up in a Roth 401(k) with them. Plan carriers typically charge based on assets under management, so they want your investment to remain with them. The other potential transfer location is to a Roth IRA via an in-service withdrawal.
After-Tax 401(k) —> Roth IRA. Roth IRA rules now apply.
Regardless of where the funds are transferred, it’s a taxable event. Provided you transfer funds shortly after making the after-tax contributions, the tax should be zero. Again, the dollars are already post-tax. Wait too long and show a capital gain in the account, you could owe a few bucks in taxes.
Your retirement carrier will send a 1099-R stating what you did/are doing and how you are making the most of the tax code.
Self-Employed Crowd:
If you are looking for Roth dollars, it’s pretty easy. Contribute $23,500 directly into your Roth solo401(k). Then have the employER contribute 20% (sole proprietor) or 25% (S-Corp) of your salary as an employment benefit.
If you have a spouse with the company, they also have a $70,000 limit.
Do the math:
$70,000 - $23,500 EmployEE - $$$ EmployER = Available after-tax dollars
Write a check for the after-tax contribution and convert. It’s easiest to convert after-tax to Roth within a third party solo401(k).
When making retirement contributions, please actually invest the funds. It’s not enough to contribute and leave dollars in the settlement fund within your 401(k). Ensure you are investing in a low-cost, passively-managed index fund. Need help investing, check out our course!
The three major tax-advantaged accounts are the 401(k), IRA, and HSA. Mrs. TFC and I can contribute a total of $162,550 between these three accounts. More including Little Miss TFC’s 529. Depending on taxation and pre/post tax contributions, this accounts for about $200,000 of gross annual income.
Pros are the tax-advantages. Cons are the restrictions within tax-advantaged accounts. If we were not able to save above the $162k, it would limit bridge account contributions which are essential for early retirement. Solution, contribute less to tax-advantaged accounts or earn more to exceed $162k in contributions. I think you know which way the TFC family leans.
P.S. Backdoor Roth conversions are traditional IRA contributions converted to a Roth IRA. Mega Backdoor Roth conversions are within a 401(k) or 403(b). Now you know.
As always, thanks for reading!
