top of page
  • Jeff Burke

Financial Planning 101 - Mega Backdoor Roth Conversions

Want to hear about a way to make the largest contribution to a Roth plan on an annual basis regardless of your income?

Welcome to the latest in the Financial Planning 101 series where I cover various topics related to personal finance and try to educate you about how these items could be relevant to you.

I have been focusing lately on all things Roth including the basics of Roth plans and the different types of Roth conversions. The last installment was on Backdoor Roth conversions. Today’s topic is the Mega Backdoor Roth Conversion.

The Basics

Most workplace retirement plans today are defined contribution plans. This means that the plan allows for certain contributions but has no guaranteed return or payout on the back end. In other words, the employee takes on the risk of return. Compare that to a defined benefit plan (think pension plan) where it is the payout that is guaranteed and the employer has to figure out how much to contribute to meet their obligation.

Under a defined contribution plan there is a maximum of $57,000 that can be contributed to the plan during the year. This amount covers all contributions including the employee and employer contributions. Very few employees will ever hit this cap based on their normal contributions. Even someone making $300,000 may max out their 401k contributions of $26,000 (assuming age 50 or over), add in a 5% employee match of $15,000 and that still leaves $16,000 remaining before hitting that cap.

Some plans allow for additional after-tax contributions to be made into the plan beyond the $26,000 maximum for 401k as long as you are under the overall $57,000 cap. And that is where the Mega Backdoor Roth comes into play.

The Conversion

These additional contributions aren’t part of a Roth even though they are after-tax contributions. Usually, these additional contributions will still be part of your 401k plan but will be segregated and identified as after-tax.

To make the conversion you would select a rollover of just these after-tax funds directly to a Roth account. Ideally, you would do this on an annual basis if possible. To do this you would need a Roth account already established with an outside financial institution.

Alternatively, you can wait until you leave the company and roll over the funds then.

Tax Handling

Unlike other Roth conversions where you recognize the amount being converted as income and have to pay income taxes on that amount, this type of conversion is handled much differently. Since the amount being converted is already after-tax contributions the amount being converted is not recognized as income and therefore no additional taxes are owed.

Once the funds are in the Roth account they are treated the same as any other funds in a Roth. That means tax-free growth and tax-free distributions later on assuming you meet the criteria for qualified distributions.

Since the contributions are made after-tax, they retain Roth like status even while not being in a Roth account. The earnings on these contributions are a different story though. The earnings will be treated like 401k earnings and will be taxed at the time of conversion. That is why ideally you can make the conversions prior to leaving the job so the contributions won’t have time to accumulate much in gains. Remember, that once the funds are converted to a Roth all gains are tax-free.

The Benefits

1. Allows high income earners a chance to make Roth contributions despite being above the income limits.

2. Being able to make these after-tax contributions is preferable to investing funds in a taxable brokerage account. A taxable account has both after-tax contributions and the gains are taxed as well. With these after-tax contributions, the gains will be tax-free once in the Roth account.

The Limitations

Much like the traditional Backdoor Roth Conversion discussed in my previous post, there are some big caveats with this type of conversion that can make this a difficult option for many to participate in.

1. You need to have the financial means to make this high level of contributions. Before doing non-Roth after-tax contributions you would need to first max out your annual 401k contributions. I would also recommend making contributions to a traditional IRA or Roth IRA before choosing this option. It can be difficult for many people to have additional funds for retirement savings once they have maxed out these other accounts.

2. Your 401k plan must allow for these after-tax contributions to be made and not many plans do (43% according to a 2017 survey). This is the biggest impediment to most people being able to take advantage of this because without this provision in your workplace plan it is a deal breaker. To see if your plan allows these contributions you will need to look at the Summary Plan Description (SPD) for your employer’s plan.

3. To get the maximum benefit from this you will want to be able to make in-service distributions so that you can do the rollovers on whatever time schedule you please. Again, this is not an option that many plans offer and you will need to refer to your SPD to see what your plan allows. If in-service distributions are not offered in your plan then you can still do the conversion when you leave that employer.


The Mega Backdoor Roth Conversion is not something that many people can take advantage of, but for those that can, it can be another powerful tool in your financial planning toolkit. Max out your other retirement contributions first and if you have the remaining capacity to set aside retirement savings check with your employers SPD to see if they allow for extra after-tax contributions.

That puts a wrap on my series on Roth related items. I hope you found this series informative as Roths are an under utilized yet extremely beneficial investing option for many people. The next installments will focus on other areas of investing. As always, if you have any questions about your finances and you want to understand if any given topic is appropriate for you please reach out to to have a free discussion regarding your situation.

7th St. Financial Inc. (“7th St. Financial”) is a registered investment adviser offering advisory services in the State of Minnesota and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by 7th St. Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption.

All written content on this site is for information purposes only. Opinions expressed herein are solely those of 7th St. Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.

106 views0 comments

Recent Posts

See All


bottom of page