Authored by Matt Waters
Most people hear “Roth IRA” and assume it’s a quaint little $7,000-per-year retirement tool for recent college grads. And for the average W-2 employee, that’s mostly true. But if you’re a business owner or high earner with access to a 401(k) plan—and especially if you control that plan—you might be sitting on a generous retirement tax planning loophole.
Let me introduce you to the Mega Backdoor Roth. It’s big. It’s beautiful. And if you’re not using it, you may be leaving some serious long-term tax alpha on the table.
First, a Quick Primer on Roths
A Roth account allows for after-tax contributions, tax-free growth, and tax-free withdrawals in retirement. Translation: you pay taxes today, but your future retirement self will thank you profusely.
The problem? Contribution limits are low. In 2025:
- Roth IRA: $7,000 ($8,000 if you’re over 50)
- Roth 401(k): $23,000 ($30,500 if over 50)
Nice, but not game-changing. Enter the Mega Backdoor Roth.
What Is the Mega Backdoor Roth?
The Mega Backdoor Roth is a strategy that allows high-income earners to potentially contribute up to $46,000 or more extra per year into a Roth account using their 401(k) plan. Here’s how it works in plain English:
- Make after-tax contributions to your 401(k) beyond the standard $23,000 employee deferral.
- Immediately convert those after-tax dollars into a Roth 401(k) or Roth IRA (either inside or outside the plan).
- Sit back and watch that money grow tax-free forever.
The maximum total 401(k) contribution in 2025 (employee + employer + after-tax) is $69,000 ($76,500 if 50+). Once your regular deferrals and employer contributions are accounted for, you can fill the gap with after-tax dollars and convert them.
Let’s break that down with an example.
Mega Backdoor Roth in Action
Let’s say you’re under 50 and have a solo 401(k) as the owner of your business:
- Employee deferral: $23,000
- Employer profit sharing: $20,000
- After-tax contribution: Up to $26,000 more
- You convert that $26,000 to a Roth
Boom. That’s an additional $26,000 of Roth exposure every year, with no income limit and no Roth IRA phase-outs.
Now imagine doing this annually for 10 years. That’s $260,000 growing tax-free. And that doesn’t even include compounding.
Why It Works (and Why Most People Miss It)
The Mega Backdoor Roth isn’t a loophole in the shady, offshore trust kind of way. It’s a legitimate strategy baked into IRS rules. But it requires a few key ingredients:
- A 401(k) plan that allows after-tax contributions
- In-plan Roth conversions or in-service withdrawals to a Roth IRA
- Ideally, fast conversion to minimize any growth on after-tax dollars (to avoid taxation on earnings)
Most off-the-shelf 401(k) plans don’t support this. But if you own your business or are working with a fiduciary plan advisor who knows how to engineer this, it’s entirely doable.
Who Should Consider the Mega Backdoor Roth?
This isn’t for everyone. But it may be ideal for:
- High-income earners who’ve maxed out traditional Roth and pretax contributions
- Business owners who control their 401(k) plan design
- Solo 401(k) participants (the cleanest implementation)
- S-corp owners who want to reduce W-2 wages but still maximize tax-free savings
- Executives at companies with custom 401(k) plans
If you’re just using the “standard” 401(k) plan design from a payroll provider, you’re probably missing this opportunity.
Mega Backdoor Roth vs Backdoor Roth IRA
Let’s clear up some jargon. The Backdoor Roth IRA is the smaller cousin, limited to $7,000–$8,000/year and subject to the pro-rata rule if you have other IRAs. Still useful, but tiny in comparison.
The Mega version is much more powerful and sits inside the 401(k) universe, allowing much larger contributions without those pesky income limits or pro-rata issues. They’re completely different beasts.
A Word of Caution: Read This Before You Go Mega
The Mega Backdoor Roth can be a powerful tool, but it’s not set-it-and-forget-it. There are a few key pitfalls that can trip up even the savviest plan sponsors:
1. Plan Design is Everything
Most 401(k) plans aren’t built to handle this. You’ll need custom language to allow:
- After-tax contributions (separate from Roth deferrals)
- In-plan Roth conversions or in-service withdrawals
If your provider gives you a blank stare when you bring this up, it’s time to upgrade your advisory team!
2. Nondiscrimination Testing Can Derail You
If your plan covers more than just owners or execs, the IRS cares a lot about fairness. After-tax contributions are subject to ACP testing, and if only your highly compensated employees are using this strategy, you may fail.
That means:
- Refunds of those Roth contributions
- Administrative headaches
- Potential compliance issues
You can mitigate this with:
- A safe harbor plan
- Thoughtful plan design and testing strategy
- Or just doing it right from the start
3. Convert Quickly or Lose Tax Efficiency
If you delay the Roth conversion, any investment growth on the after-tax contributions becomes taxable. Automate conversions monthly or quarterly to keep things clean and tax-free.
Want to Explore This?
If you’re a business owner or executive and want to know whether your current 401(k) plan allows this (and how to integrate it) reach out. We help clients redesign plans for flexibility, tax efficiency, and generational wealth building.
Because when it comes to retirement planning, the tax code doesn’t reward the uninformed. But can potentially reward those who know where to look.
If you’re ready to explore how these tools could serve your family’s long-term goals, let’s talk.
Disclosures: This information does not constitute legal or tax advice. PCIA and its associates do not provide legal or tax advice. Individuals should consult with an attorney or professional specializing in the fields of legal, tax, or accounting regarding the applicability of this information for their situations.
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness.
