Unlocking Hidden Potential: How Mega Roth Conversions Can Transform Your 401(k) Tax Strategy
Author: Dax Dixson, CFA
“The Backdoor Roth IRA: Is This the Greatest Investment Plan Ever?”
In recent years, headlines such as this have become commonplace, stemming from the prospect of changing tax rates and the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the subsequent SECURE 2.0 Act passed in 2022.
Retirement planning typically centers on tax-advantaged vehicles like IRAs and 401(k)s. However, standard annual contribution limits – $7,000 for IRAs and $23,500 for 401(k)s – often leave high-income earners frustrated and searching for additional savings opportunities.
Enter the Mega Backdoor Roth: a potential solution.
But what exactly is the Mega Backdoor Roth strategy? Who should take part? And is it worth taking the time to find out — especially if you already have retirement accounts?
In short, the answer is yes. While the Mega Backdoor strategy is not for everyone, for individuals with access to specific employer-sponsored retirement plans, this strategy can significantly boost your retirement savings in a tax-advantaged manner.
Here is some baseline information to consider about Mega Backdoor Roth contributions to help you begin considering whether one might be right for you.
| What is the 415 Limit?
The 415 limit for defined contributions plans, like 401(k)s and 403(b)s, defines the maximum amount that you can contribute to a defined contribution plan in a single year. This limit applies to all sources of contributions, including your contributions and your employer contributions.
There are two parts to the 415 limit:
- Dollar Limit: This amount is adjusted for inflation. For 2025, this limit is $23,500.
- Compensation Limit: This is based on your annual compensation. It is calculated as 100% of compensation or the dollar limit, whichever is less.
In other words, as long as you make at least $70,000 you can contribute up to $70,000 to your 401(k) or 403(b).
You may be asking yourself, “Wait, isn’t the limit $23,500 per year? So how does this 415 limit apply to me?”
| Sources of Employer Plan Contributions
There are three main sources of employer plan contributions:
Your Elective Deferrals
These are the contributions that are periodically deducted from your paycheck and placed into your 401(k) or 403(b). For 2025, the maximum contribution via elective deferral is $23,500. Those of you over 50 are also eligible for a catch-up contribution of $7,500.1
Employer Matching Contributions
These are the contributions that your employer makes to your plan. Typically, employers will match a certain percentage or dollar amount of your contributions.
After-Tax Contributions
These are contributions that you might be able to make to your employer plan after you have contributed the maximum amount via elective deferral. Not all employer plans allow you to make after-tax contributions, so you will need to review your plan documents to see if you can make after-tax contributions. The maximum after-tax contribution is determined by the 415 limit, minus all other types of contributions.
| 2025 Limits
For illustrative purposes only
1: Source: https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000, Nov. 2024
Example:
Sarah, Marketing Director
Sarah is a 42-year-old Marketing Director for a fast-growing tech company. She has a bachelor’s degree in marketing and an MBA. Here’s a glimpse into her work and finances:
| Work
Sarah leads a team of marketing professionals responsible for developing and executing marketing campaigns across various digital and traditional channels. She works long hours but enjoys the fast-paced environment and the impact her work has on the company’s growth. Her base salary is $200,000 per year.
| Compensation
In addition to her base salary, Sarah receives a bonus based on the company’s performance. Last year, her bonus was $50,000, bringing her total compensation to $250,000. She is also offered stock options as part of her compensation package, which could be worth a significant amount depending on the company’s stock price performance.
| Retirement Savings
Sarah maxes out her 401(k) by saving into a Roth 401(k), and her employer matches up to 5% of her salary in contributions up to $10,000.
Since Sarah is under 50, her 415 limit is $70,000 per year. Since she maxes out her 401(k) contribution and her employer contributes another $10,000 per year, Sarah will be able to contribute $36,500 on an after-tax basis to her employer plan.
| Mega Back Door Roth
The final step is to convert the after-tax contributions within your employer plan to a Roth IRA or Roth 401(k). Some plans allow you to rollover any after-tax contributions to a Roth IRA whenever you request to do so, while others allow you to convert your after-tax dollars to Roth within the plan. Some plans will even automatically convert your after-tax dollars to Roth periodically, usually once a year. All plan types are different, so you will need to consult your plan documents to determine if your plan allows for after-tax contributions and how the plan handles Roth conversions.
| Considerations
The Mega Backdoor Roth strategy is a powerful tool to increase your retirement savings by allowing you to contribute more to your employer plan then convert your contributions to a Roth 401(k) or Roth IRA. However, there are several key considerations to remember:
- Not all plans allow it: Your employer plan must offer after-tax contributions and in-plan Roth rollover or Roth 401(k) options.
- Tax implications: Converting after-tax contributions to Roth may trigger income tax on any earnings accrued within the plan.
- Complexity: This strategy involves multiple steps and potential tax consequences. Consider seeking guidance from a financial advisor or tax advisor.
When you are planning for your financial future, or considering how to ensure financial security throughout your life, a financial advisor can help you take steps to achieve your goals. Comprehensive financial planning is not just about managing your money – it’s a holistic process that addresses every aspect of your financial life, from investments and taxes to estate planning and insurance. Stearns Financial Group is a true fee-only, fiduciary, wealth management practice with experienced financial planners waiting to help you create a clear and strategic path to support both your present needs and future aspirations. We serve clients in North Carolina, with offices in the Triad and the Triangle. Talk to us today about defining your comprehensive financial strategy.
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