Mega Backdoor Roth: What It Is and Its Contribution Limits

Mega Backdoor Roths can help supercharge your retirement savings. Here's what you need to know about eligibility, contribution limits and tax advantages.

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For high earners looking to supercharge their retirement savings, enter the mega backdoor Roth. This financial strategy serves as a tax-shelter for retirement funds, which allows you to add tens of thousands of dollars more annually after-tax than allowed for pre-tax investments.

What is a Mega Backdoor Roth?

A mega backdoor Roth is a retirement investment strategy that can give high-salaried employees, of at least $300,000 annually in income, a boost to grow their savings in a tax-free account after they have met the IRS-regulated limit on pre-tax contributions. To do so, investors must convert a traditional IRA to a Roth IRA .

The Basics of a Mega Backdoor Roth

If you are a generously compensated employee with ample cash flow, you can save far more using a mega backdoor Roth, which you fund with after-tax dollars.

To participate, you must have maxed out your employer’s retirement saving plan in pre-tax dollars. Then you add funds in after-tax dollars and convert them into a Roth, which you may do with what’s called an “in-house conversion.” If your employer’s plan doesn’t allow for that type of conversion, you may ask its administrator to add it.

Who Can Benefit from It?

Within the broad net of well-paid employees with plenty of cash flow, CPA Larry Pon of Pon & Associates in Redwood City, California, has observed a subgroup. “The mega backdoor Roth is for those clients with high incomes who cannot save any money,” he told me. “There are so many people with $500,000 W-2s who have no savings.“

Pon added that he gets lots of questions, too, from clients with more modest salaries, even though they lack the financial profile to use the strategy.

How Does the Mega Backdoor Roth Work? (H2) Step-By-Step Process

1. As a first step, you must have saved the pre-tax maximum allowed by law in your company-sponsored retirement plan. Your plan administrator can tell you the amount allowed by the IRS and so can the tax agency.
2. Find out from your retirement-plan administrator whether the plan allows after-tax contributions for mega backdoor Roth conversions. If not, ask them to add it.
3. Make after-tax contributions: Find out from the administrator or your financial advisor the maximum you can add in one year, factoring allowable contributors for you if you’re over 50 or between 60 and 63 or both, and deposit the money in your retirement plan.
4. With the help of the plan administrator and your financial advisor, enact the mega backdoor Roth conversion.

Mega Backdoor Roth Formula

Here’s an example of the mega backdoor Roth formula, provided by Michael Brocavich, CFP and partner at Center for Financial Planning in Southfield, Michigan. First, take the allowable limit of $70,000, subtract your salary deferral of $23,500, and then deduct from that any employer match. The difference gives you the amount you can add after tax.

Finally, you must then adjust your 401(k) contribution plan either through your human resources department, or for those with online access to their plans, you can go directly to the provider’s site and adjust your contributions.

Benefits of a Mega Backdoor Roth

“The biggest benefit of a mega backdoor Roth is a tax-free account for either you or your heirs,” Brocavich told me. “A Roth account is a great account, which allows you to take larger distributions to do the extra things in retirement, like travel and home improvements.”

Increased Contribution Limits

Each year, the IRS raises the ceiling on contribution limits and offers catch-up options as you get closer to retirement age.

Tax-Free Growth

You pay taxes on the funds only once, when you convert your funds from an IRA to a Roth. After that, you owe no taxes and can enjoy tax-free growth.

Flexibility in Retirement

With a mega backdoor Roth IRA, you can withdraw funds without penalty after they have been in the account for five years and you are over age 59 1/2.

No Required Minimum Distributions (RMDs)

Because your funds are in a Roth, that investment isn’t subject to required minimum distributions (RMDs), which start for other retirement investments at ages 72 or 73. “Roth IRAs do not require withdrawals until after the death of the owner,” noted the IRS.

Contribution Limits for 2024 and 2025

Each year the IRS changes contribution limits to retirement plans. Those limits apply to pre-tax and after-tax deposits.

2024 Contribution Limits

In 2024, the mega backdoor Roth limit is $69,000 or $76,500 (includes $7,500 in catch-up contributions) if you’re 50 or older, compared to $23,000 or $30,500 if you’re 50 or older in pre-tax contributions. If your company matches your savings in that account, you would subtract that amount from your contribution so that you don’t exceed the contribution limit, according to the financial firm Fidelity Investments.

2025 Contribution Limits

For 2025, the maximum is $70,000, and up to $77,500 for those over 50. This max includes the $23,500 for salary deferrals, $7,500 on catch-up contribution for those over age 50 and your employer contribution. Starting in 2025, there is also what’s called a “super catch-up,” which allows those between 60 and 63 to add $3,750. That means for certain individuals, you can add $81,250 to your retirement savings in 2025.

Why Contribution Limits Matter for a Mega Backdoor Roth

The IRS caps mega backdoor Roth contributions. You must follow them to a T to avoid being taxed unnecessarily.

What to Consider Before Implementing a Mega Backdoor Roth

Check Your 401(k) Plan

Not every company-sponsored retirement plan facilitates the mega backdoor Roth option. However, that doesn’t mean the plan can’t be changed to add it. Ask the plan administrator to do so.

Understand the Tax Implications

A high earner may put extra money in a brokerage account and then be subject to taxes on earnings. Instead, if you choose to put those funds in a mega backdoor Roth in your retirement account, you pay taxes before the conversion, but you won’t owe taxes on it again.

Evaluate Your Financial Goals

Investing in a mega backdoor Roth is a way to jumpstart your retirement savings. Once you’ve revisited your financial goals, evaluate whether that strategy jibes with what you and family members need in retirement.

Consult a Financial Advisor

Seeking out advice from a trusted financial advisor is the first step when making any major money move. Be sure, though, that the FA understands the ins and outs of the mega backdoor Roth, because not all do. The person you hire must make sure you follow the strict guidelines for the conversion, so that you don’t end up with unwanted tax consequences later.

Common Misconceptions About Mega Backdoor Roth (H2): It’s Only for the Wealthy

While the mega backdoor Roth is for individuals who have a generous income and an abundant cash flow, those taxpayers may or may not be considered wealthy. So, it isn’t only for the wealthy.

It’s Complicated

Opening a mega backdoor Roth is fairly straightforward. However, to make sure you handle it correctly, hire a savvy financial advisor well-versed in how to set up mega backdoor Roths. Not all FAs understand the intricacies of the financial strategy as Robin Giles, CFP, at Apex Wealth Management, in Katy, Texas, recently told me. So be sure to vet possible FAs first.

It’s Not Worth the Effort

The effort is minimal: checking with your employer’s retirement plan administrator, setting aside the money and effecting the conversion. This small effort can yield you tens of thousands of dollars extra in your retirement account each year, which grows tax-free for you and your heirs. That is definitely worth it.

Bottom Line

The financial strategy with the awkward-sounding name—mega backdoor Roth—can jumpstart your retirement savings. If you’re a high earner with a bountiful cash flow, why take the steps to learn if it’s right for you?

By Michelle Lodge, Contributor