Open enrollment season is here, and as people plan their 2025 budgets, some lucky high earners may consider boosting their retirement savings using a rare but increasingly popular strategy for their employer-sponsored 401(k). )s.
The “mega backdoor Roth” — a three-part strategy that allows workers to deposit more of their paychecks into their retirement accounts than the usual limit — will allow workers to deposit up to $70,000 into their 401(k)s by 2025. While 401(k) contributions are not tied to open enrollment’, I think [this period] is a good indicator for people to evaluate how they are saving,” Matthew Fleming, financial planner and senior wealth advisor at Vanguard, told MarketWatch.
The mega Roth backdoor remains a rare feature in 401(k) plans, but Jorie Johnson, a financial advisor at Financial Futures in New Jersey, said more than 30% of her clients now have the company’s 401(k) plans that offer the option, significantly more than a few years ago. About half of her clients who access the strategy use it to put extra money aside for retirement, even if they don’t cap the amount at $70,000.
“We’re seeing more and more companies offering 401(k)s because more people are asking for it,” Johnson told MarketWatch. “It’s not difficult for a company to add this” because most major payroll systems can handle it, she added. “So it’s low-hanging fruit for HR to offer it as a benefit.”
This is how the strategy works:
1) Employees maximize allowable contributions in their company 401(k) – which the IRS recently announced would be $23,500 by 2025, with employees age 50 and older getting an additional $7,500 in catch-up contributions.
2) They pass on an extra portion of their paycheck to their 401(k) fund after-tax contributions.
3) They immediately convert those after-tax contributions to Roth status (which you can do automatically with some plans), so they can grow tax-free and eventually be withdrawn tax-free in retirement.
Related: The IRS Just Set 401(k) Limits for 2025 – Here’s How Much You Can Save
It’s a way for high-income earners — who earn too much to qualify for increasing their retirement contributions through a regular Roth IRA (which is an individual account, not a corporate plan) — to save up to $70,000 in their employer-sponsored 401 account. (k) next year, or $77,500 for those over 50 years of age. That is indeed quite ‘mega’.
“It’s really nice to get tax-free growth on this money,” Fleming said.
Although its popularity is increasing, the use of this strategy remains rare for a number of reasons. On the employer side, only a small fraction of 401(k) plans offer all the mechanisms to do a mega backdoor Roth: a Roth option, the ability to make after-tax contributions, and the ability to use those dollars to convert into a Rot. At Fidelity, only 10% of 401(k) plans can do all three, noted Mike Shamrell, vice president of thought leadership at Fidelity. “It’s not very common,” Shamrell told MarketWatch.
On the employee side, most Americans simply don’t earn enough to contribute the maximum of $23,500 to their 401(k). “It’s not like you’re doing anything wrong; it’s just the norm for many working Americans,” Shamrell said. For context, according to the Census Bureau, the median income for all U.S. households in 2023 was $80,610, and $119,400 for married couples.
See also: Avoid the ‘ticking tax time bomb’ of 401(k) and IRA by going all-in on Roths, says expert
Those who can max out their 401(k) may choose to put additional retirement dollars into a traditional or Roth IRA. However, there is a $7,000 annual contribution limit for IRAs in 2025, and people who earn more than $165,000 in 2025 as individual filers and $246,000 as joint filers cannot save in a Roth IRA. This is where the mega backdoor Roth strategy can be useful.
Financial Futures’ Johnson said that for clients focused on saving more for retirement, “I recommend they do the mega backdoor Roth,” while those who have shorter-term goals may be better served in other ways.
Interested savers should consider whether there “may be competing wealth priorities or objectives” that would benefit from investing those after-tax dollars “in a way that is more accessible” than a retirement account, Vanguard’s Fleming said. He also noted that people with very high net worth should consider the tax implications of growing their wealth for beneficiaries through retirement accounts, and whether those dollars “might be better used to fund different types of trust vehicles.”
People who have done their math and are interested in the mega-backdoor Roth strategy can call their 401(k) plan provider and ask if their plan offers it. Another way to call it is “after-tax contributions convertible to a Roth.”
If you qualify, the plan provider would set the deduction on each paycheck going into the 401(k) to reach the maximum of $23,500 for 2025.
You would then also decide how much of your salary you want to go into the 401(k). after-tax contributions. Remember that the sum of all your contributions and your employer will match no more than $70,000 next year. For example, if you contributed the maximum amount of $23,500 and your employer match was another $10,000, you could earn up to $36,500 in after-tax contributions to your 401(k).
Johnson said some of her clients, who can’t afford to save more from their regular salaries, have set up their bonuses to fund mega backdoor Roth schemes.
The provider can then schedule the after-tax contributions to automatically convert to Roth (as an “in-plan conversion”) when they are deposited, so you don’t pay taxes on any gains. Fleming said these after-tax dollars are typically invested in whatever the rest of the 401(k) is invested in — but “there’s not one uniform set of rules,” so people will have to ask their providers how their specific plan functions. and act accordingly. For example, at Fidelity, some plans may allow users to choose a specific Roth resource allocation.
Other plans, instead of making in-plan conversions, implement the mega-backdoor Roth strategy by taking these after-tax contributions out of the plan as a Roth IRA rollover, Fleming noted. “You should talk to the plan provider to understand what options are available,” he said.
People with accounts at Vanguard can track their money by logging into their 401(k) and looking at the source data, which shows how much is in pre-tax contributions, Roth contributions and—for people who use the mega-backdoor Roth— strategy – then – tax contributions, Fleming said.
The Roth mega-backdoor isn’t easy and “every situation is unique,” Shamrell said. “Seeking advice from a tax professional is the best way to help you understand the potential tax consequences of your strategy.”
