Supercharge Your Roth Part 2: Mastering the Mega Backdoor

May 20th, 2025 by Blake Pinyan

The Backdoor Roth contribution, as outlined in my previous article, is a strategy that remains relatively unknown to many. Even more under the radar is the Mega Backdoor Roth contribution, largely because not everyone has the ability to take advantage of it.

In this article, we’ll take a deep dive into the Mega Backdoor Roth strategy. We’ll start by providing context on its key components, review employee contribution limits, explain how the process works, discuss how it’s reported on a tax return, and conclude by examining who this strategy is best suited and who it may not benefit.

Employer-Provided Retirement Plan Buckets

Before diving into how the Mega Backdoor Roth works, it’s important to first understand the types of contributions that may be available within employer-sponsored retirement plans, such as 401(k)s, 403(b)s, and 457 plans. The 401(k), in particular, is the most common type of employer-provided retirement plan and is the vehicle through which the Mega Backdoor Roth contribution is typically implemented—so we’ll use it as our primary example.

When a company offers a 401(k) plan, you’re generally given two main contribution options: Pre-Tax (also referred to as Traditional) and Roth. As explained in the article on the Backdoor Roth, Pre-Tax contributions reduce your taxable income in the year they’re made by providing a tax deduction. However, because you received that upfront tax benefit, the IRS will tax your withdrawals in retirement.

On the other hand, Roth contributions are made with after-tax dollars, meaning you receive no immediate tax deduction. But since you’ve already paid taxes on that income, qualified withdrawals in retirement are completely tax-free.

After-Tax (Non-Roth) Contributions

There is, however, a third type of contribution available in some employer-sponsored retirement plans—though not many employers offer it. This is known as an After-Tax (Non-Roth) contribution.

From my experience, relatively few employers allow employees to make After-Tax contributions to their retirement plans. You might see this option labeled as “Non-Roth” since, despite being made with after-tax dollars like Roth contributions, it is distinct and functions differently.

This contribution type is essentially a hybrid of Pre-Tax and Roth characteristics. As the name suggests, After-Tax contributions are made with after-tax dollars, meaning there is no immediate tax deduction. In that sense, they resemble Roth contributions. However, the key difference lies in how earnings are treated. While the contributions themselves can be withdrawn tax-free, the earnings grow tax-deferred and are taxed upon withdrawal, similar to Pre-Tax contributions.

This creates a blended tax outcome when you take distributions. Part of the withdrawal (your contributions) is tax-free, while the portion representing investment earnings is taxable. Furthermore, while the principal (after-tax contributions) can generally be withdrawn at any time, accessing the earnings before age 59½ could trigger early withdrawal penalties unless specific exceptions apply.

This mixed tax treatment can make withdrawals more complex, as each distribution is treated as a combination of return of principal and taxable income, based on the ratio of contributions to earnings.

So, why would anyone choose to contribute to the After-Tax bucket?

The main reason lies in the higher contribution limits it allows and, more importantly, the potential to implement a Mega Backdoor Roth strategy.

Contribution Limits

For the two primary types of employer-provided retirement plan contributions—Pre-Tax and Roth—the employee contribution limit for 2025 is $23,500 for individuals under age 50. For those 50 or older, the limit increases to $31,000, which includes a $7,500 catch-up contribution. Thanks to the SECURE Act 2.0, individuals aged 60, 61, 62, or 63 are eligible for an enhanced catch-up contribution of $11,250, allowing them to contribute up to $34,750.

Employees can reach these limits through Pre-Tax contributions, Roth contributions, or a combination of both. After-Tax (non-Roth) contributions, however, fall into a separate category and are not subject to these employee deferral limits.

Employer contributions vary by company. Some offer matching contributions based on how much the employee contributes, while others may contribute a fixed percentage of the employee’s salary regardless of participation. It’s best to consult your company’s Summary Plan Description (SPD) or employee benefits guide to understand the specifics of your plan.

The maximum total that can be contributed to a 401(k), 403(b), or 457 plan—including employee and employer contributions— in 2025 is:

• $70,000 for those under age 50
• $77,500 for those 50 or older (due to the $7,500 catch-up)
• $81,250 for those aged 60–63 (due to the enhanced catch-up of $11,250 under SECURE Act 2.0)

However, this total is limited to the lesser of the IRS maximum or your earned income. For example, a 25-year-old earning $60,000 per year can contribute no more than $60,000 total, whereas a peer earning $80,000 could contribute the full $70,000 in 2025.

After-Tax contribution limits are calculated based on the remaining room available after accounting for both employee Pre-Tax/Roth contributions and employer contributions. These contributions are not included in the standard employee deferral limit but do count towards the overall annual contribution maximum.

Example:

Emily is 28 and earns $200,000 per year. Her employer offers a 401(k) plan that includes a 3% non-elective contribution and supports Pre-Tax, Roth, and After-Tax (Non-Roth) contributions.

• Emily contributes the maximum $23,500 Pre-Tax (the limit for her age group).
• Her employer contributes $6,000 (3% of her $200,000 eligible salary).
• The total of those contributions is $29,500.
• Therefore, she has up to $40,500 remaining for After-Tax contributions ($70,000 IRS max – $23,500 – $6,000).

As this example shows, the amount you can contribute After-Tax depends on what you’ve already contributed Pre-Tax or Roth and what your employer has contributed. For individuals already maxing out their employee contributions, like Emily, After-Tax contributions offer an additional way to boost retirement savings.

Employer Limits on After-Tax Contributions

Even among employers that offer After-Tax contributions, many set their own limits on how much you can contribute. These restrictions might be expressed as a percentage of your salary or a fixed dollar amount.

For example, I’ve seen plans that cap After-Tax contributions at 10% of the employee’s salary. Returning to our example: although the IRS allows Emily to contribute up to $40,500 in After-Tax dollars, if her employer caps After-Tax contributions at 10% of her $200,000 salary, she can only contribute $20,000—far below the IRS maximum.

Because of these potential limitations, be sure to review your company’s SPD or benefits documents to determine whether:

1. After-Tax contributions are allowed, and
2. If so, whether the plan imposes a lower limit than the IRS maximum.

How The Mega BackDoor Roth Works

Now that we’ve established the three types of contributions employees can make to their retirement accounts—Pre-Tax, Roth, and After-Tax (Non-Roth)—and covered their respective contribution limits, we can dive into how the Mega Backdoor Roth strategy works.

For this strategy to be effective, the retirement plan must allow in-service conversions. An in-service conversion means the employee is permitted, while still employed (i.e., “in service”), to move money from one contribution bucket to another within the plan. Before making After-Tax contributions with the intention of executing a Mega Backdoor Roth, employees should verify that their retirement plan allows in-service conversions. This information is typically available in the company’s benefits package or SPD.

The two buckets involved in the Mega Backdoor Roth strategy are the After-Tax and the Roth. The implementation is conceptually similar to the Backdoor Roth IRA strategy discussed in Part 1.

Here’s how it works:

1. You contribute to the After-Tax bucket within your 401(k) plan.
2. Once the contribution is eligible for conversion, you transfer the funds to your Roth 401(k).
3. Since both the After-Tax contribution and the Roth 401(k) are funded with after-tax dollars, this conversion does not trigger a tax event—you’re simply moving after-tax money between two after-tax accounts.

However, it’s important to note that earnings on After-Tax contributions are considered Pre-Tax and subject to taxation upon conversion. That’s why it’s strongly recommended to convert these funds as soon as they become eligible, minimizing or potentially eliminating any taxable earnings.

The longer the money stays in the After-Tax bucket, the more time it has to accumulate earnings—and the more likely you’ll owe taxes when you convert. For this reason, quick conversions are ideal.

That said, executing this efficiently can be tricky if your retirement plan doesn’t support automatic or immediate conversions. Some plans won’t notify you when your After-Tax contributions are eligible for conversion, leaving it up to you to monitor your account manually.

Additionally, since most employees contribute to their 401(k) throughout the year—typically each pay period—you’ll likely have multiple After-Tax contributions to track and convert. From a best-practice standpoint, if your plan doesn’t allow for automatic conversions:

• Check your account frequently after your first After-Tax contribution to determine how soon funds become eligible for conversion.
• Set a calendar reminder based on that cadence.
• Consider setting a reminder after each paycheck to review and convert new contributions as they become eligible.

While this can be more time-consuming to manage, converting After-Tax funds throughout the year—rather than waiting to do one large conversion at year-end—can significantly reduce or eliminate taxes on earnings.

In simple terms, the Mega Backdoor Roth strategy involves making After-Tax contributions to your 401(k) and then converting those funds to your Roth 401(k)—ideally as quickly as your plan allows.

Important Dates / Zeroing Out the After-Tax 401(k)

The Mega Backdoor Roth, much like the Backdoor Roth, requires that both contributions and conversions be completed before the end of the calendar year for effective implementation.

For individuals manually converting After-Tax contributions to a Roth 401(k), it’s critical to ensure all contributions and conversions are completed by December 31st. Failing to do so may result in tax complications or limit the strategy’s effectiveness for that year.

In addition, zeroing out the After-Tax bucket by year-end can help avoid blended tax treatment on future distributions. This means you can prevent a scenario where a distribution is partially tax-free (return of principal) and partially taxable (earnings). By converting the full After-Tax balance—including any earnings—before year-end, you keep your tax reporting clean and avoid the complexity of pro-rata tax calculations in future withdrawals.

How It Shows Up on Your Tax Return / What Tax Documents You’ll Receive

For the Mega Backdoor Roth, you can expect to receive a Form 1099-R from your retirement plan. This form reports the conversion of funds from the After-Tax bucket to the Roth bucket and outlines the tax treatment of that conversion.

• Box 1 (Gross Distribution) will show the total amount converted from your After-Tax account to your Roth 401(k).
• Box 2a (Taxable Amount) should report only the taxable portion of that conversion—typically just the earnings on your After-Tax contributions.

As discussed earlier, the sooner you convert After-Tax contributions once they’ve settled, the less likely it is that those funds will have accrued earnings. That means a lower (or possibly zero) taxable amount in Box 2a, since the original After-Tax contributions themselves are not taxable upon conversion.

Unlike the traditional Backdoor Roth strategy, which involves an IRA and requires filing Form 8606, the Mega Backdoor Roth is implemented within an employer-provided retirement plan and does not require Form 8606. Tax reporting for the year focuses solely on any earnings associated with the After-Tax contributions, as reported on Form 1099-R.

To summarize:

• After-Tax contributions = not taxable upon conversion.
• Earnings on those contributions = taxable upon conversion.
• Form 1099-R is the key tax document to look out for.
• Form 8606 is not applicable.

Putting It All Together

Let’s bring this strategy to life with an example. We’ll continue with Emily, who is 28 years old, earns $200,000 per year, and participates in her company’s 401(k) plan, which includes a 3% employer match. Her employer allows Pre-Tax, Roth, and After-Tax contributions with no internal limitations, and she is subject to the $70,000 total retirement contribution limit for 2025.

Emily defers 12% of her salary into her Pre-Tax 401(k) as her employee contribution. By year-end, she hits the $23,500 maximum allowed for her age group (since the 12% would get her to $24,000 and her contributions stop once she reaches the maximum). Her employer contributes $6,000 (3% of her $200,000 salary). This leaves her with $40,500 of potential After-Tax contribution space ($70,000 total limit − $23,500 employee contribution − $6,000 employer contribution).

Emily decides to defer another 10% of her salary into After-Tax contributions, which will total $20,000 by year-end—well within her available limit. Each time she receives a paycheck, she sets a reminder to convert her After-Tax contributions to her Roth 401(k) via an in-service conversion. Before December 31st, she confirms that all After-Tax contributions have been converted.

By year-end, Emily’s 401(k) is funded with:

• $23,500 to her Pre-Tax 401(k) (saving her taxes in the current year),
• $6,000 in employer contributions (Pre-Tax),
• $20,000 converted to her Roth 401(k) via the Mega Backdoor Roth strategy.

For her 2025 tax preparation, Emily receives Form 1099-R showing her After-Tax to Roth conversions. Since she converted the funds shortly after each contribution, the earnings were minimal, resulting in a very small taxable amount in Box 2a. The principal of the After-Tax contributions is not taxed upon conversion, as it shares the same after-tax nature as the Roth 401(k).

Who It’s For and Who It’s Not For

Now that we’ve covered what the Mega Backdoor Roth strategy is and how it works, let’s look at who can benefit from it—and who likely won’t.

Who It’s For

The Mega Backdoor Roth is a niche strategy, primarily because not many employers offer the necessary plan features to implement it. It’s designed for:

• Employees whose retirement plans allow After-Tax (Non-Roth) contributions and in-service conversions. These features are essential and can usually be confirmed in the plan’s SPD.
• High-income earners who have already maxed out their regular employee contribution limit and are looking for additional tax-advantaged savings options.
• Employees of larger companies, which are more likely to have the administrative capacity to offer and support After-Tax contributions and in-service conversions.
• Financially disciplined individuals who can contribute beyond the $23,500 (or higher, with catch-ups) limit and are proactive about managing in-service conversions—either regularly throughout the year or in a lump sum before year-end.
• Self-employed individuals with Solo 401(k) plans that support After-Tax contributions and in-service conversions, often by working with a flexible plan administrator.

Who It’s Not For

This strategy is not suitable for:

• Employees whose plans don’t allow After-Tax contributions or in-service conversions. These plan limitations are outside of the employee’s control and prevent the strategy entirely.
• Those who haven’t yet maxed out their regular Pre-Tax or Roth 401(k) employee contributions. If you’re not already hitting the employee contribution limit, there’s no need to pursue the extra complexity of the Mega Backdoor Roth.
• People who aren’t prepared to manage the conversion process. Waiting too long to convert increases taxable earnings on After-Tax contributions.
• Self-employed individuals using SEP IRAs, SIMPLE IRAs, or Solo 401(k)s that do not allow After-Tax contributions or in-service conversions.

Conclusion

The Mega Backdoor Roth contribution can be an effective strategy for building additional Roth savings—but only for those eligible to use it. If your employer’s retirement plan offers this feature, it’s essential to:

• Understand whether your employer imposes any limits on After-Tax contributions.
• Calculate how much you can contribute based on IRS limits, your existing Pre-Tax/Roth contributions, and your employer’s contributions.

At Anchor Bay, we guide our clients through the process of implementing Mega Backdoor Roth strategies when appropriate. Having Roth money in retirement can be a powerful advantage, especially given the uncertainty of future tax rates.