Most experienced investors have heard of the traditional “Backdoor Roth,” but fewer are familiar with its bigger and more powerful cousin: the Mega Backdoor Roth (MBR).
For high-income earners—especially business owners—the Mega Backdoor Roth can be an excellent strategy to maximize retirement savings. Unlike standard Roth deferrals you make directly into a 401(k), the Mega Backdoor Roth leverages after-tax contributions inside a qualified retirement plan, such as a 401(k) Profit Sharing Plan.
Once made, these after-tax contributions can be converted to Roth dollars, allowing for significantly higher annual Roth contributions than would otherwise be possible. Importantly, this feature must be written into the plan document, whether for a group plan or a customized individual 401(k) plan.
To take advantage of the Mega Backdoor Roth, your retirement plan must allow two key features: after-tax contributions and in-service distributions. Once in place, you contribute to the after-tax portion of your 401(k), and those contributions can then be converted into Roth dollars—allowing you to bypass the standard Roth limits and significantly increase your tax-free retirement savings.
After-Tax contributions allow a participant to put up to $46,500 ($70,000 – $23,500 = $46,500) in 2025 into a Roth IRA, in addition to salary deferrals that can be either Pre-Tax or Roth. Below equation can be used to calculate how much a participant can contribute into his or her After-Tax portion in 2025:
$46,500 – Employer Match/NEC – Profit Sharing Contribution =
After-Tax Contribution
Adding a Mega Backdoor Roth feature to a 401(k) plan requires thoughtful plan design. For businesses with Non-Highly Compensated Employees (NHCEs), after-tax contributions are subject to the Actual Contribution Percentage (ACP) test. This can sometimes limit how much Highly Compensated Employees (HCEs) are able to contribute to the after-tax portion of the plan, even if employer contributions are offered.
Because of these complexities, small business owners should work with an experienced Third-Party Administrator (TPA) to help structure the plan properly and ensure ongoing compliance with non-discrimination testing.
