Mega-Backdoor Roth Strategy: Maximizing Your Retirement Savings

Individuals with high incomes are usually not allowed to use a Roth IRA, but a mega-backdoor Roth conversion strategy is one way for these individuals to contribute up to $39,500 to a Roth IRA, get the tax-free benefits on the growth of these monies, and then withdraw the funds in retirement.

What if someone told you that you could contribute an additional $39,500 to your Roth IRA without penalty? This is the magic of a mega-backdoor Roth, a distinctive 401(k) rollover strategy that allows individuals with higher incomes to roll monies over a Roth IRA totaling an amount that exceeds the federal government’s limits on contributions.

Individuals with high incomes are usually not allowed to use a Roth IRA, but a mega-backdoor Roth conversion strategy is one way for these individuals to contribute up to $39,500 to a Roth IRA, get the tax-free benefits on the growth of these monies, and then withdraw the funds in retirement.

Single individuals who make more than $140,000 (modified gross income) and married couples with more than $208,000 are usually not allowed to contribute to a Roth IRA. Read on if you made more than those numbers last year and would like to learn how you can save up to $39,500 by investing in a mega-backdoor Roth strategy.  

What Is a Mega-Backdoor Roth Strategy?

You probably have heard the term Roth, but what does it mean with the term mega backdoor strategy? This type of investment strategy allows you to place a maximum of $37,500 in either a Roth 401(k) or Roth IRA. On top of this, you can place this $37,500 in either account in addition to the regular limits for both accounts.

There are many small details that you will need to understand better before implementing this mega-backdoor Roth strategy, but now you should have a better idea of what the strategy allows you to do

Roth IRA vs. Traditional IRA vs. a 401(k) Plan

The main distinction between a Roth and a traditional IRA is the tax benefits. With a traditional IRA, you contribute pre-tax income and these contributions grow tax-deferred. This means you get a tax break upfront on your contributions by deducting them from your taxes and then pay taxes on them when the money is withdrawn.

If you do not need an upfront tax break from a traditional IRA, you can instead put your money into a Roth IRA. Roth IRAs are attractive because all of your contributions and investment earnings that accumulate come out tax-free when you are ready to use the money for retirement. However, you cannot deduct these contributions from your tax bill.

A 401(k) is a retirement savings plan that is offered by an employer so employees can save and invest a portion of their paycheck every month and accumulate money towards retirement. They are easy, convenient, and are attractive if the company matches your contributions. That is essentially free money from your employer.

Having all three plans is a lucrative way to save for one’s future, but a Roth IRA works best if you do not need to touch the contributions until retirement since the withdrawals are tax-free. 401(k)s are more limited, but there are contribution limits each year on both IRAs depending on your adjusted gross income shown on your tax return.

Benefits of a Roth IRA

The major benefit of a Roth IRA is that you can contribute money you have already paid taxes on and then can withdraw this money tax-free in the future. For most individuals, a Roth IRA is more lucrative than a traditional IRA because of these tax-free benefits. In addition, the investments available are more flexible than a company-run 401(k).

  • A Roth IRA allows investors to grow their money tax-free; traditional IRAs get a tax deduction upfront, but the contributions are tax-deferred, which means you pay income taxes on your withdrawals during retirement
  • Roth IRAs give investors more flexibility and control because you have a wider variety of investment choices than a 401(k) plan
  • Roth IRAs are better for individuals with higher incomes because they do not have “phase-out” ranges that traditional IRAs have, which means the tax deduction is limited for those with higher incomes
  • If you contribute after-tax dollars from your paycheck to your Roth IRA, you can withdraw your savings after turning 59 ½ years of age without owing tax because they were pre-taxed before being contributed (that only counts towards the contributions, not the earnings).
  • Although a Roth IRA seems like the way to go when saving for retirement, individuals with higher incomes are usually not eligible if you are single and have a modified adjusted gross income of over $140,000 or over $208,000 for married. If you do meet the qualifications, there are still limits to what you can contribute:
  • You can contribute up to $6,000 if you are under the age of 50.
  • You can contribute up to $7,000 if you are age 50 or over.

These are important figures to know when viewing the income qualifications for a Roth IRA.

High-Income Restrictions for Roth IRA

If your income is more than the thresholds listed above, you cannot contribute directly to a Roth IRA. You are also limited on the contributions to this plan, which means you cannot contribute large sums of money and watch them grow tax-free for your retirement future. That is where a mega-backdoor Roth IRA comes into play.

Through this special conversion, you can indirectly contribute money into a Roth IRA by first putting it into a traditional IRA even if you exceed the income limits usually placed on Roth accounts. This conversion is completed by taking these steps:

  • Max out your 401(k) plan contributions
  • Roll the money over from this traditional 401(k) to your traditional IRA
  • Convert the monies into a Roth IRA that was rolled over into the traditional IRA

You are avoiding income restrictions when you do this Roth IRA conversation, but there may be income taxes involved on the funds being rolled over to the Roth account that previously were not taxed. Therefore, you will want to complete the steps after you deposit the monies to your traditional account to minimize any potential gains.

When to Take a Mega-Backdoor Roth IRA Conversion

If your income is more than the limits on Roth contributions and you can max out your company’s 401(k) plan and IRA contributions you should think about taking the steps to complete a Mega Roth IRA conversion. If you cannot max out your 401(k) you cannot make the after-tax contributions required for a mega-backdoor Roth conversion:

  • $19,500 pre-tax monies to a 401(k) for individuals under 50
  • $26,000 pre-tax monies to a 401(k) for individuals 50 and older
  • $6,000 pre-tax monies to a traditional IRA for individuals under 50
  • $7,000 pre-tax monies to a traditional IRA for individuals 50 and older

Once your 401(K) and traditional IRA are both maxed out, you can now work towards rolling over up to $39,500 if you are under the age of 50 ($45,000 for individuals 50 and older) through a mega-backdoor Roth IRA conversion. The number may be lower if your employer has also contributed to your 401(k):

  • You are 45 years old and contributed the maximum allowance of $19,500 to your 401(k).
  • Your company contributed a standard 6 percent matching contribution of $1,170.
  • You subtract the total of your contributions and your employer’s ($20,670) to the IRS contribution limit of $58,000 401(k).
  • You can rollover up to $37,330.

These numbers change for someone who is 50 and older since the allowances are more, and the rollover allows you to transfer these monies without paying the taxes you would usually owe with this type of conversion. However, your employer-sponsored 401(k) must allow after-tax contributions and in-service withdrawals.

  • After-tax contributions: After you have maxed out your 401(k), your retirement plan must allow contributions from money that has already been taxed. Remember that earnings on after-tax contributions are usually taxable when they are withdrawn, but they are not through a Roth IRA.
  • In-service withdrawals: Make sure your 401(k) allows you to take withdrawals from your account while you are still employed because this is essential to the mega-backdoor Roth process.

If you decide to max out your retirement plans so you can complete this conversion strategy, you will need to make an after-tax contribution to your 401(k) and then immediately take out an in-service withdrawal before those contributions produce returns that would be taxable when they are rolled over to the Roth IRA plan.

How Does a Mega-Backdoor Roth IRA Conversion Work?

You have checked the boxes that your company allows both after-tax contributions and in-service withdrawals. Now you can begin the process of a mega-backdoor Roth IRA. Max out your 401(k) with your after-tax contributions and then withdraw that money, roll it over into a Traditional IRA, then immediately convert it.

Remember that a normal backdoor Roth is the same process—you open a traditional IRA because your higher income does not have limits for this plan and then immediately convert it into a Roth IRA and pay the taxes. However, this is not considered “mega” because you can only contribute up to $6,000 to your traditional IRA.

The “mega” comes in through your larger, after-tax contributions and in-service withdrawals to your 401(k). This is how you can skirt around the income and contribution limits and convert up to $39,500 from your 401(k) to your traditional IRA, and then immediately to your Roth IRA. Then, those monies grow tax-free for the future.

  • Step 1—Contribute $19,500 ($26,000 if you are 50 and older) out of your paycheck to your 401(k).
  • Step 2—Make additional, after-tax contributions to your 401(k) up to $58,000 ($64,500 if you are 50 and older). Your after-tax contributions will be less if your employer also contributes to your 401(k) because you cannot have over $58,000 ($64,500 if you are 50 and older) according to IRS contribution limits.
  • Step 3—Take an in-service distribution of $39,500 ($45,000 if you are 50 and older) out of the 401(k) plan before they earn returns on investment.
  • Step 4—Transfer those monies to a nondeductible traditional IRA.
  • Step 5—Roll those monies over to a Roth IRA.

You will want to make sure you transfer the monies immediately from your 401(k) to the traditional IRA and then from that traditional IRA to your Roth IRA. This is because you do not want to earn any investment revenue on these funds or else there will be tax consequences.

Be Aware of the Pro-Rata Rule

Because there are no stipulations on income or limits on contribution when rolling money over in the traditional IRA to the Roth account, you can convert your monies and start and then grow them tax-free. Just remember that you should not roll over pre-tax money sitting in your traditional IRA due to what is called the “pro-rata rule.”

So, you have taken all the proper steps to get ready for a mega-backdoor Roth conversion only to find out there is an obstacle—the pro-rata rule. This rule requires that you combine all of your IRAs to determine how much income tax you will own when you convert them. You must ensure you do not have any other pre-tax IRA accounts.

  • Calculate the total balance of all of your IRAs (this would not include a Roth IRA, but you do not have that right now!).
  • Calculate the total balance of all after-tax dollars you have in your IRAs, which are non-deductible contributions made directly to your IRA and rollovers from a company plan.
  • Divide your after-tax dollars by your IRA balance to figure out the percentage of after-tax dollars.
  • Determine what the taxable amount of your distribution is by taking the total distribution and multiplying it by the percentage of after-tax dollars.
  • The result would be the taxable portion at ordinary rates.

If you have more than one IRA, you will need to eliminate them, including any traditional IRAs, SIMPLE IRAs, and SEP IRAs. They can be eliminated by rolling them over into your 401(k) plan before taking the steps to complete the mega-backdoor Roth conversion. You will need to check if your company allows “roll-ins.”

If your company does not allow roll-ins, also called a reverse IRA to 401(k) rollover, you can set up a solo 401(k) and then roll the IRA monies into that plan. Self-employed individuals benefit from a solo 401(k) retirement plan, and their spouses who work for their business at least part-time, but individuals with full-time jobs can also use them.

Pro-Rata Rule and a 401(k)

These 401(k) plans also have the $58,000 contribution limit and could be a great vehicle to make sure you are not violating the pro-rata rule. Simply set up your solo 401(k), roll over the pre-tax IRA monies, and then start the mega-backdoor Roth conversion process. If you only have one nondeductible IRA, you are fine and not in violation.

Withdrawals from a 401(k) may also be subject to the pro-rata rule, which states that you are not allowed to withdraw pre- or post-tax contributions from your traditional 401(k). Rather, you are required to withdraw an amount that is equal to the ratio of your contribution sources. How does this affect the steps to completing the Roth conversion?

You cannot singularly make an in-service withdrawal from your 401(k) balance of post-tax contributions that is a mixture of pre-tax and post-tax money. This is exactly why you are rolling over your pre-tax 401(k) monies into a traditional IRA first. This includes any employer-matched monies also being placed in the non-Roth accounts.

What is Next to Avoid the Pro-Rata Rule

Once you have eliminated all your traditional IRA accounts by rolling those monies over into either your employer-sponsored 401(k) or a solo 401(k), you can start the mega-backdoor Roth conversion. The steps are the same as when you only had one traditional IRA and the only difference was eliminating your other IRA accounts.

  • Rollover your maxed-out monies from the 401(k) to your single, traditional IRA.
  • Make a non-deductible IRA contribution up to your IRA limits (depending on if you are over or under 50 years of age).
  • Convert the monies sitting in the traditional IRA to a Roth IRA.

You should wait at least one day so that the monies rolled over and deposited to the traditional IRA clear before converting them to the new Roth IRA. Although not mandated by the IRA, you should also maintain transparent records showing the steps you took to convert the monies to the Roth IRA.

The Benefits of a Mega-Backdoor Roth Conversion

The main benefit of a mega-backdoor Roth retirement plan is the tax advantages. Although you cannot write your Roth IRA contributions off on your taxes, the year you make your contributions, your money grows tax-free, not tax-deferred. This is advantageous for individuals who contribute large sums of money to a Roth IRA.

When you withdraw your money when you are ready to retire, you will not pay any taxes on your Roth IRA funds. You will not owe taxes on the $39,500 you roll over into a Roth IRA or the investment growth this money incurs. For example, if you earn a return on investment of $40,000, you will not owe taxes on the $39,500 or the $40,000.

Similarly, if you made $39,500 in after-tax contributions to your 401(k) and it earns a return on investment of $40,000, you would be required to pay taxes on your after-tax contribution of $39,500 because it was an after-tax investment. You will also be taxed on the additional $40,000 because it does not grow tax-free in a traditional 401(k) plan.

Another benefit of a mega-backdoor Roth conversion is that higher-income individuals are allowed to open a Roth IRA. As discussed, normally there are income limits that preclude higher-income individuals from contributing to a Roth IRA and attaining the tax-free benefits. A mega-backdoor Roth conversion skirts this problem.

Is a Mega-Backdoor Roth Conversion Right for You?

In order for this mega-backdoor Roth conversion strategy to work, you will need to make sure your company allows you to make after-tax contributions to your 401(k) retirement plan. You will also need to verify that you can complete in-service rollovers while you are still employed. If not, you will need to wait until you leave your job to complete it.

You may simply need to check with your company’s human resources department and ask them if after-tax contributions and in-service rollovers are permitted. If they say no, you could ask your company if they will add them to the plan so that you can take the mega-backdoor Roth conversion. Some employers may actually work with you on it.

Completing this mega-backdoor Roth strategy is a perfectly legal way to get a large amount of money into a Roth account when your income exceeds the normal Roth IRA limits. However, this is really only for individuals who have a lot of money in their savings; if not, there are other options to saving for retirement with a Roth 401(k).

You Can Also Use a Roth 401(k) for Your Conversion

A Roth 401(k) is similar to a traditional 401(k) in that it is also sponsored by your employer and funded with your after-tax dollars up to the specified limits on contributions—up to $19,500 for individuals under 50 and $26,000 (a $6,500 catch-up contribution) for ages 50 and older. It combines features of a 401(k) and a Roth IRA:

  • Funded with after-tax dollars, not pre-taxed monies like a traditional 401(k).
  • Contributions and earnings end up being tax-free withdrawal upon retirement, as a regular Roth IRA.
  • Contributions end up being taxed at an attractive lower tax rate and the distributions are tax-free.

Roth 401(k) retirement plans work best for individuals who are in a higher tax bracket. They can contribute after-tax money and then withdraw tax-free. Whether you choose a traditional or Roth 401(k), there may be more benefits to forgoing the mega-backdoor Roth for now and maxing out one of these 401(k) plans:

  • You will get a tax break right away when you contribute to your traditional 401(k) because your taxable income decreases during the year you contribute to the plan.
  • You can also defer taxes on your earnings you acquire from your investments in the 401(k) until after you retire.

A Roth 401(k) allows for the same benefits as a standard Roth account in that you contribute after-tax money and watch it grow tax-free, similar to a Roth IRA. Your tax break will be somewhat delayed, but you can consider the mega-backdoor Roth conversion if you have also maxed out the traditional 401(k).

What About the Self-Employed?

If you are a self-employed individual and have a solo 401(k) (also known as an Individual 401(k)) plan, you are a few steps ahead of an employed individual. As discussed earlier, these plans are for self-employed individuals and their spouses who work for the business part-time. These plans are sometimes called self-employed, individual, or one-participant 401(k) plans.

Solo 401(k) retirement plans are lucrative in that you can contribute up to nine times more per year than in a traditional IRA. They are also the perfect vehicle for self-employed business owners to take advantage of the mega-backdoor Roth conversion.

As discussed earlier, solo 401(k) plans are not just for the self-employed. Even employed individuals who are trying to avoid the pro-rata rule can also open a solo 401(k) so that they have a place to roll over any traditional IRAs that need to be eliminated, as discussed earlier.

Just like an employed individual, you will first need to verify that your solo 401(k) allows after-tax contributions and in-service withdrawals since they all do not offer these services automatically. If yours does not, you should not panic, as you can customize your solo 401(k) pretty seamlessly so that you can take advantage of a Roth IRA.

Alternatives to Mega-Backdoor Roth IRA Conversions

It is very important that you roll over your money from the 401(K) plan to the traditional IRA and then to the Roth IRA before you see any earning investment returns because they will be taxed during the conversion process. If you are still considering a mega-backdoor Roth conversion, here are some final thoughts to complete the process:

  • A mega-backdoor Roth IRA conversion is for individuals who are disallowed from making direct Roth IRA contributions due to their higher income
  • You can only complete this process if your company allows both after-tax contributions and in-service withdrawals from your employer-sponsored 401(k) plan
  • Only do this when you have already maxed out your traditional 401(k) contributions
  • Consider this conversion if you are interested in contributing more money towards retirement than the annual IRA limits
  • Only complete this process if you have paid down other debt, have a sufficient amount of extra income in the bank, and have already taken care of other financial goals (like saving for your child’s college aspirations)

If you do not check the boxes above, there are alternatives to a mega-backdoor Roth IRA conversion. You can complete a traditional backdoor Roth IRA conversion, which skips the step of maxing out your 401(k) and just rolls over monies from a traditional IRA to a Roth IRA. The contribution will be smaller but will still be tax-free down the road.

You can also invest in a taxable account such as investing in stocks that grow tax-deferred or, as discussed earlier, contribute to either a Roth 401(k) for tax-free withdrawals or a solo 401(k). That way, you are still investing towards your retirement but not pushing a huge amount of money to it all at once.

There are other tax-free options out there to save money, such as Health Savings Accounts, college 529 plans, and different types of IRAs. These work well for individuals who only want to start small with their contributions—even as little as $50 a month—to start saving for the future and gain the tax benefits in which to do so.


Maximizing your tax savings for retirement is important, and using this mega-backdoor Roth IRA strategy is one way to do this for the future. As long as you have the money to push towards this process and your company’s 401(k) meets the two requirements of allowing after-tax contributions and in-service withdrawals, you can use a Roth IRA.

Rolling over monies from a 401(k) to a traditional IRA to a Roth IRA will help you avoid the contribution limits and income disqualifiers that come with a Roth IRA. That way, you can save for your future, save on taxes, and withdraw your money tax-free when you are ready for your retirement.

What should I do next?

We are in the expert level strategies of financial independence with the Mega Backdoor Roth Strategy, but if you are just starting out on your financial independence journey, we strongly encourage you to start tracking your money. We believe that Personal Capital is the most comprehensive free financial tool you can find online to manage your finances and track towards your FI date.

We love the free features Personal Capital offers, including the ability to:

  • Track and manage your income and expenses
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  • Analyze your investment portfolios for excessive fees (this is especially important early on in your FI journey)
  • Analyze your investment portfolios for proper asset allocation
  • Run various retirement planning calculations with their amazing retirement calculators

Our favorite financial management tool is free to use and take less than a minute to sign up. Though you must create Personal Capital login credentials to use them, you don't need to enroll in Personal Capital's advisory service. As you may know, we always try to avoid fees whenever possible. We also strongly recommend fee-only financial advisors, so you know how much you're paying up front and avoid advice with conflicts of interest. By signing up with Personal Capital for free and aggregating all your accounts in one place, you'll be well on your way toward financial independence.

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What Is A Solo 401(k)? Retirement Savings For The Self-Employed. – Forbes Advisor

Roth 401(k) Definition (

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