Open-enrollment season is here, and as people plan out their budgets for 2025, some lucky high earners may consider supercharging 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 lets employees direct more of their paychecks into workplace retirement accounts than the typical limit — will allow workers to put up to $70,000 into their 401(k)s in 2025. While 401(k) contributions are not tied to open enrollment, “I think [this period] is a good marker for people to evaluate how they’re saving,” Matthew Fleming, a financial planner and senior wealth adviser at Vanguard, told MarketWatch.
The mega-backdoor Roth remains a rare feature in 401(k) plans, but Jorie Johnson, a financial adviser at Financial Futures in New Jersey, said more than 30% of her clients now have company 401(k) plans that offer the option, up significantly from just a few years ago. About half of her clients with access to the strategy use it to put away extra money for retirement, even if they’re not maxing it out at $70,000.
“We’re seeing more company 401(k)s offering it because more people are asking for it,” Johnson told MarketWatch. “It’s not hard for a company to add it on,” as most major payroll systems are able to handle it, she added, so “it’s such low-hanging fruit for HR to offer it as a benefit.”
1) Employees max out the allowable contributions in their company 401(k) — which the IRS recently announced would be $23,500 for 2025, with workers ages 50 and older getting an extra $7,500 in catch-up contributions.
2) They direct an additional share of their paychecks to go into their 401(k) as after-tax contributions.
3) They immediately convert those after-tax contributions to Roth status (which some plans let you do automatically), so they can grow tax-free and eventually be withdrawn tax-free in retirement.
It’s a way for high-income individuals — who earn too much to be eligible to boost their retirement contributions through a regular Roth IRA (which is an individual account, not a company plan) — to save up to $70,000 in their employer-sponsored 401(k) next year, or $77,500 for those over age 50. That is pretty “mega,” indeed.
“It’s really nice to get tax-free growth on this money,” said Fleming.
While growing in popularity, usage of this strategy remains rare for a number of reasons. On the employer side, only a small share of 401(k) plans offer all of the mechanisms to do a mega-backdoor Roth: a Roth option, the ability to make after-tax contributions, and the ability to convert those dollars to a Roth. 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 super prevalent,” 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 something wrong; it’s just that’s the norm for many working Americans,” Shamrell said. For context, the median income for all U.S. households was $80,610 in 2023, and $119,400 for married couples, according to the Census Bureau.
See also: Dodge the 401(k) and IRA ‘ticking tax time bomb’ by going all-in on Roths, expert says
Those who are able to max out their 401(k) can choose to put extra retirement dollars into a traditional or Roth IRA. However, there is a $7,000 annual contribution limit on IRAs in 2025, and people who earn more than $165,000 as single filers and $246,000 as joint filers in 2025 can not save in a Roth IRA. This is where the mega-backdoor Roth strategy can be of use.
Johnson of Financial Futures said that for clients who are focused on saving more for retirement, “I recommend they do the mega-backdoor Roth,” while those who have shorter-term goals might be better served in other ways.
Interested savers should consider whether there “might be competing wealth priorities or goals” that could benefit from investing those after-tax dollars “in a way that’s more accessible” than a retirement account, Vanguard’s Fleming said. He also noted that people with very high net worths should consider the tax implications of growing their estate for beneficiaries through retirement accounts, and whether those dollars “may be better used to help 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 of terming it is “after-tax contributions that can be converted to a Roth.”
If you’re eligible, the plan provider would set up the deduction from each paycheck going into the 401(k) to reach the $23,500 maximum for 2025.
You would then also decide how much of your paycheck you want going into the 401(k) as after-tax contributions. Remember that the sum of all your contributions and your employer match next year cannot exceed $70,000. For example, if you contributed the maximum $23,500 and your employer match was another $10,000, you could make 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 set up their bonuses to fund mega-backdoor Roth plans.
The provider could then set the after-tax contributions to automatically convert to Roth (as an “in-plan conversion”) when they are deposited, so that you don’t pay taxes on any gains. Fleming said that typically, these after-tax dollars are 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 instance, at Fidelity, some plans may allow users to elect a specific allocation for Roth sources.
Other plans, instead of doing in-plan conversions, execute the mega-backdoor Roth strategy by moving these after-tax contributions out of the plan as a Roth IRA rollover, Fleming noted. “You have to talk to the plan provider to understand which options are available,” he said.
People with accounts at Vanguard are able to track their money by logging into their 401(k) and looking at the source detail, which shows how much is in pretax contributions, Roth contributions and — for people using the mega-backdoor Roth strategy — after-tax contributions, Fleming said.
The mega-backdoor Roth is not straightforward and “every situation is unique,” Shamrell said. “Seeking advice from a tax professional is the best way to help you understand the potential tax impacts of your strategy.”
