Mega Backdoor Roth: A Tax-Friendly Retirement Strategy for Serious Savers
Contributing to a traditional 401(k) or IRA can help reduce your current tax bill, but you may run into some drawbacks in retirement. Withdrawals are taxed as ordinary income, and you must take required minimum distributions (RMDs) once you reach age 73. On the other hand, qualified Roth distributions are tax-free after age 59½, as long as you’ve held the account for at least five years.* Plus, Roth accounts are not subject to RMDs during your lifetime.
Roth IRA contribution limits are somewhat low ($7,000 in 2025, or $8,000 if you are age 50 or older), and you can’t contribute at all if your income exceeds certain limits. You can make larger contributions to a Roth 401(k) regardless of your income.
If you would like to shelter as much as possible in a Roth account, find out if your employer’s 401(k) plan allows both after-tax contributions and in-service withdrawals. If so, you could make special after-tax contributions to your traditional 401(k) and then move (or convert) the funds to a Roth IRA or a Roth 401(k). This strategy — called the mega backdoor Roth — is only an option for some people under limited circumstances.
Saving to the max
The employee contribution limit for 401(k), 403(b), and government 457(b) plans is $23,500 in 2025, with an additional $7,500 catch-up contribution for those age 50 and older, for a total of $31,000. And new for 2025, workers age 60 to 63 can make a larger “super catch-up” contribution of $11,250 for a total of $34,750. Like all catch-up contributions, the age limit is based on age at the end of the year, so you are eligible to make the full $11,250 contribution if you will turn 60 to 63 any time during 2025 (but not if you will turn 64).
In 2025, the combined total for salary deferrals (not including catch-up contributions), employer contributions, and employee after-tax contributions is $70,000 or 100% of compensation, whichever is less. You generally must max out salary deferrals before you can make additional after-tax contributions. For example, if you are age 60, and you contribute the maximum $34,750 to your 401(k), and your employer contributes another $15,000, you may be able to make an after-tax contribution of $31,500 for a grand total of $81,250.
You might consider yourself lucky if your plan allows after-tax contributions, because it’s not very common, especially at smaller companies.
Fast track your Roth conversion
Your after-tax contributions are not taxable upon withdrawal, but any converted earnings would be taxed as ordinary income. Thus, if in-service withdrawals are permitted, it may make sense to transfer your after-tax contributions to a Roth account as soon as possible to help reduce the amount of investment growth and the resulting tax burden.
Bear in mind that 401(k) distributions are subject to the pro-rata rule, which requires you to withdraw proportional amounts of pre-tax and after-tax amounts if your account balance contains both types of contributions. So if your 401(k) balance is $100,000 ($80,000 in pre-tax money and $20,000 in after-tax money) any distribution, including a conversion, must also consist of 80% pre-tax dollars and 20% after-tax dollars. In this case, you might avoid triggering taxes on the distribution by moving your pre-tax dollars to a traditional IRA at the same time your after-tax dollars are transferred to a Roth account.
If your employer accounts for pre-tax and post-tax contribution amounts and associated earnings separately, you might be able to withdraw your entire after-tax balance (including the taxable earnings) and leave your pre-tax account balance in the 401(k). Again, the tax bill may be minimal if the conversion is completed soon after making the after-tax contribution (or you roll the earnings portion into a traditional IRA).
You might consider yourself lucky if your plan allows after-tax contributions, because it’s not very common, especially at smaller companies. If your workplace plan allows after-tax contributions but doesn’t permit in-service withdrawals, this strategy might still be worthwhile if you expect to retire or leave your employer in the near future.
*Distributions from traditional or Roth accounts taken prior to age 59½ may be subject to a 10% federal tax penalty, with certain exceptions.