Backdoor Roth vs. Mega Backdoor Roth

Many retirement savers are not aware that that a massive Roth contribution option for the self-employed or small business owner known as the “Mega Backdoor Roth” is available and that is even more popular than the “Backdoor Roth IRA.”  This article will explore how the two types differ and explain how they each work. We’ll also dive into the rules of the strategies which will ensure you understand what you need to do.

The Roth IRA vs. Mega Backdoor Roth IRA

In 2026, the most one can contribute to a Roth IRA is $7,500 or $8,600 if at least age 50. In general, if you are single and earn more than $168,000 or married and filing jointly and earn more than $252,000, you are not permitted to make Roth IRA contributions.

The main reason behind this rule change was to increase tax revenue after the financial crisis of previous years. Roth conversions generate immediate taxation on the amount of the conversion. Consequently, the Backdoor Roth IRA conversion strategy was born.

Why is the Roth IRA so Popular?

Three words: Tax-Free Retirement. If you like paying taxes, the Roth IRA is not for you. A Roth is funded with after-tax money. So long as you meet the requirements, you will never owe taxes on that money (or the income it generates) ever. This is the opposite of a traditional, or pretax, IRA. Contributions are made before your income is taxed. Therefore, you get an immediate tax break on whatever you contribute. However, distributions, including the earnings, will be taxable.

As mentioned, there are requirements to receive tax-free Roth money, but there are only two. First, you must be at least age 59 1/2. Easy enough, since retirement money shouldn’t be touched until later in life. Secondly, any Roth must have been open for at least five years. You cannot fund a Roth and expect to pull the money out, tax-free, in a year or two. This shouldn’t be an issue since time is on your side when accumulating retirement wealth.

Another great facet of the Roth IRA is that there are no required minimum distributions. Once you reach age 73, you must start withdrawing from your pretax IRA, no matter if you need the money or not. There is no such requirement for a Roth. It’s not mandatory to ever distribute those funds. They can continue to grow for as long as you want. If you’re lucky enough to not need those funds, you can pass them along to your beneficiaries, untouched.

Related: The Roth IRA Five-Year Rule Explained

How Does the Backdoor Roth IRA Work?

As we stated in the opening, if you earn too much money, you cannot contribute to a Roth IRA. Let’s amend that to: you cannot directly contribute to a Roth IRA. This is where the “backdoor” comes in. The Backdoor Roth IRA is a strategy that allows you to contribute to a pretax IRA, and then convert to Roth. Because of the income limitations of an IRA, you will not receive a tax deduction on these contributions. If you left those funds right there, your distributions would also be taxable. So why do it?

The only reason one would generally contribute after-tax funds to a traditional IRA is to convert them to Roth. With the Backdoor Roth strategy, you would immediately convert the contribution to Roth. Because there would be no earnings on those funds, no taxes would be due.

Here’s how it works for someone just starting out:

• Open both a traditional and Roth IRA
• Make an after-tax contribution to the traditional IRA
• Work with your IRA custodian to complete the conversion
• The conversion would be reported on IRS Form 1099-R as a zero-tax conversion

The Backdoor Roth IRA can be done per person, so a married couple can go up to $13,000 or $15,000 if they are both age 50 or older.

Related: Can I do a Backdoor Roth every year?

The Mega Backdoor Roth 401(k)

The Mega Backdoor Roth 401(k) allows self-employed individuals to move significantly more money into a Roth account than a Roth IRA permits.

With a properly structured Solo 401(k), you can contribute up to $70,000 in 2025, or $77,500 if age 50 or older, depending on income.

A Solo 401(k) allows:

• Employee deferrals up to $23,500 ($31,000 if 50+)
• Employer profit-sharing contributions (generally up to 25% of compensation)
• After-tax contributions, which can be converted to Roth

The ability to make after-tax contributions and convert them to Roth is what makes the Mega Backdoor strategy possible.

This approach works best with a Solo 401(k) because these plans are not subject to certain nondiscrimination tests that apply to larger employer plans, making it easier for business owners to maximize contributions.

To qualify, you must have self-employment income and no full-time employees other than a spouse.

Solo 401(k) Plan After-Tax Contribution Mechanics

After-tax 401(k) contributions are separate from employee deferrals and employer profit-sharing contributions. Because of this, they allow you to contribute beyond the standard pre-tax or Roth limits, up to the overall annual cap. These contributions are not tax-deductible, but they can be converted to Roth under the Mega Backdoor strategy.

For example, in 2025, an individual under age 50 earning $90,000 in self-employment income could contribute up to the full $70,000 annual Solo 401(k) limit, if the plan allows after-tax contributions.

By contrast, if contributing only through traditional pre-tax or Roth employee deferrals and employer profit-sharing, the total would typically be significantly lower based on income and compensation limits.

How Does it Work?

IRS Notice 2014-54 opened the door to the Mega Backdoor Roth 401(k) strategy because it allowed for funds to be distributed from a 401(k) plan separately without a pro rata formula requirement.  Below are the steps one can take to make these types of contributions:

1. Establish a Solo 401(k) plan.
2. Establish two bank accounts for the plan. In addition, if you expect to make pretax employee deferral contributions, it is suggested that a separate bank account also be opened for accounting simplicity purposes.
3. Make a contribution into the plan’s after-tax bank account.
4. Transfer those funds to the Roth plan bank account using the backdoor.
5. (optional)You can then move those funds to a Roth IRA if you wish.
6. The plan administrator will need to file IRS Form 1099-R in January of the following year to report the tax-free conversion.

Related: Beginner’s Guide to Alternative Investments

Deadline for making a Mega Backdoor Roth Contribution

The deadline for making a contribution is the date the adopting employer files its tax return, including extensions.  Because the contribution is in after-tax funds, it does not impact the individual’s federal income tax return (IRS Form 1040).

Conclusion

Although both strategies share many similarities, do not get confused by the Backdoor Roth IRA and the Mega Backdoor Roth 401(k). The both seem almost too good to be true; thankfully they are 100% legal.

Anyone who is otherwise eligible can engage in Backdoor Roth IRA – even if you are over the income thresholds for directly contributing to a Roth. However, you must satisfy the eligibility requirements to open a Solo 401(k) and utilize the Mega Backdoor, which is the obvious winner here for the sheer amount of annual contributions you can make.

One thing to remember is where you open your Solo 401(k) matters. Not all providers will offer a way through the backdoor, so it’s important to know the option is available if you need it.

Pay attention to the rules and work with the right professionals if you wish to employ either strategy. A tax nightmare can arise if you miss a step or try to withdraw funds too early. If you wish to learn more, please fill out a contact form with any questions and we can help you on your way to a tax-free future!