Mega Backdoor Roth: Breaking Through the Limits of Tax-Advantaged Accounts
- Kirk Reagan
- Feb 11
- 3 min read
Updated: Feb 12
Most service members and veterans know the importance of saving in tax-advantaged accounts like the TSP or an IRA. The problem? Contribution caps are often too low.
In 2025, the TSP/401(k) limit is $23,500 for those under age 50 and $31,000 for those 50 and older. If you’re a high earner, that may represent less than 10% of your income. The IRA cap is even smaller — just $7,000 per year — and may be unavailable to high earners due to income phaseouts.
For many high earners, those limits create a false sense of security. You may feel you’re “maxing out” retirement savings when in reality you’re contributing far less than your long-term needs require.
That’s where the Mega Backdoor Roth strategy comes in.
What Is the Mega Backdoor Roth?
Many 401(k) plans — though unfortunately not the Thrift Savings Plan — allow after-tax contributions beyond the standard $23,500/$31,000 employee deferral limits. For 2025, the combined contribution limit (employee + employer + after-tax) is $70,000/$77,500.
The “mega” comes from the ability to roll those after-tax dollars into a Roth IRA or Roth 401(k), where they can grow tax-free for life.
This effectively turns your 401(k) into a much larger Roth pipeline, letting high earners build far more tax-free growth space than standard contribution caps allow. Over time, this can mean hundreds of thousands — even millions — in additional tax-free retirement income.
How It Works
While the TSP doesn’t allow after-tax, non-Roth contributions, many private-sector 401(k) plans do. A typical strategy looks like this:
Contribute up to the regular employee limit ($23,500 or $31,000 with catch-up in 2025).
Leave room for your employer match or profit-sharing contributions.
Make after-tax, non-deductible contributions on top.
As soon as the after-tax contributions are posted, convert them to Roth — either into your Roth 401(k) (if your plan allows in-plan conversions). This is not a taxable event, since contributions were already made after tax.
If your plan doesn’t allow in-plan Roth conversions but does permit in-service withdrawals, roll the after-tax balance into a Rollover IRA and then convert it to Roth, be sure to file IRS Form 8606 to document your nondeductible basis.
Common Pitfalls
Pro-rata trap: If you must use a traditional/rollover IRA and you already have other pre-tax IRA balances (Traditional, SEP, SIMPLE), the IRS pro-rata rule applies. This can create unexpected tax bills. Make sure to consult a tax professional on these rules if you have balances in these types of accounts.
Crowding out employer match: Don’t overfill with after-tax contributions and accidentally not leave enough space for your company match or profit-sharing.
Delays in conversion: Converting promptly is critical. Any growth in the after-tax subaccount before conversion will be taxed as ordinary income (not the lower capital gains rate).
Is It Right for You?
The Mega Backdoor Roth isn’t available in every plan, and it comes with administrative hurdles. But for high earners — especially those frustrated by low contribution caps — it can be a game-changer.
Before pursuing it, be sure to:
Confirm your 401(k) plan allows after-tax contributions.
Check whether in-plan Roth conversions or in-service withdrawals are permitted.
Coordinate with your tax advisor or financial planner to avoid pitfalls.
If the strategy is right for you, it could save you well over $1 million in taxes over your lifetime.
If you’d like help evaluating whether the Mega Backdoor Roth fits into your retirement plan, I’d be happy to walk you through the details and tailor a strategy to your situation. If you’d like specific tax advice, please consult with a tax advisor.
Comments