Traditional Backdoor Roth & Mega Backdoor Roth

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Roth IRA Basics

Roth IRAs are tax-favored retirement accounts. You can make contributions to your own Personal Roth IRA or to your Employer’s Roth 401(k). Those contributions, if prudently invested, will grow over time.

Once you turn 59 1/2, you can begin pulling money out of Roth IRAs, without paying any Federal or State Income Tax. So, the Income Tax Rate for Roth IRAs is always the same – ZERO.

Also, unlike Traditional Non-Roth IRAs and 401(k) Plans, you are not Required to take you money out of a Roth IRA during your lifetime – there is no age 73 Required Minimum Distribution with Roth IRAs.

401(k) Basics

Contributions to a 401(k) can be made as follows:

  1. Employee Pre-Tax Contributions (aka Deferred Employee Contributions)
  2. Employee After-Tax Contributions
  3. Employer Matching/Non-Elective Contributions
  4. Employer Elective Contributions

#1 Employee Pre-Tax Contributions

Employees can defer up to $22,500 of their wages in 2023, and contribute those Deferred Wages to their Employer’s 401(k) Plan. If you are over age 50, that 2023 $22,500 amount jumps up to $30,000.

When you make Deferred Wage Contributions to your employer’s 401(k) Plan, those Deferred Wages are not subject to Income Tax.

For example, let’s say you make $50,000 a year. Your W-2 will show $50,000 as Taxable Wages, which must then be reported on your Federal and State Personal Income Tax Return. If your employer has a 401(k) Plan and you contribute $10,000 to that plan out of your wages, your W-2 will show $40,000, not $50,000.

#2 Employee After-Tax Contributions

Employees can also contribute an additional $43,500 of their wages to their Employer’s 401(k) Plan, but this $43,500 comes out of your Net Pay – meaning it’s not Tax Deferred.

Note: This $43,500 is reduced, dollar for dollar, by any amount the Employer Contributes to your 401(k), whether it is as an Employer Matching/Non-Elective Contributions or Employer Elective Contributions.

#3 Employer Matching/Non-Elective Contributions

Depending on the Employer and what’s permitted in the 401(k) Plan Document, employers can make matching contributions to each employee’s 401(k) account. Typically, the employer will match up to 3% of an employee’s compensation, if the employee contributes their own wages to their 401(k).

#4 Employer Elective Contributions

Employer Elective Contributions are Employer Contributions that are additional Employer Contributions made to an Employee’s 401(k) Plan, whether or not the Employee made any Employee Contributions.

Traditional Backdoor Roth

A Backdoor Roth is a strategy used by individuals whose income is too high and are prohibited in making any Roth Contributions. Those 2023 income thresholds are $153,000 for Single individuals and $228,000 for married filing joint individuals.

Despite the income thresholds, you can still make a Backdoor Roth Contribution.


You make Traditional IRA Contributions that are Non Deductible Contributions, and then you immediately Rollover (Convert) that Non-Deductible Traditional IRA Contribution to a Roth IRA.

Caveat – The Pro-Rata Rule: This strategy only makes sense if you have $0 in an existing Traditional IRA or if you do not have any other Traditional IRA accounts. If you do have any Traditional IRAs, then a Pro-Rata portion of the Rollover-Converted amount will subject to taxation.   

Mega Backdoor Roth

A Mega Backdoor Roth is done through using Employee After-Tax Contributions to your 401(k).

Here’s how it works.

There are two ways to do a Mega Backdoor Roth:

  1. Convert and Move your Employee After-Tax Contributions to your Employer’s Roth 401(k) OR
  2. Rollover your Employee After-Tax Contributions to Your Own Roth IRA

#1 Convert your Employee After-Tax Contributions to your Employer’s Roth 401(k)

Let’s say you are able to make the maximum $43,500 Employee After-Tax Contribution to your 401(k). and let’s say your Employer’s 401(k) Plan includes a Roth 401(k). Under this strategy, you would make your $43,500 Employee After-Tax contribution to your 401(k) Plan and then you would immediately Convert and Move that $43,500 to your Employer’s Roth 401(k).

In order for this Backdoor Roth Strategy to work, your Employer’s 401(k) Plan must include an “In-Plan Roth Conversion” feature.

Rollover your Employee After-Tax Contributions to Your Own Roth IRA

Let’s say you are able to make the maximum $43,500 Employee After-Tax Contribution to your 401(k) .

In order for this Strategy to work, your Employer’s 401(k) Plan must allow Active Employees to Roll these Employee After-Tax Contributions out of the Employer’s 401(k) Plan and into a Roth IRA. This is known as an “In-Service Rollover”.

Caveat – The Pro-Rata Rule: A majority of 401(k) Plans separately account for After-Tax Contributions and the Earnings on those contributions. Under the Pro-Rata Rule, any Earnings on those After-Tax Contributions would be Taxable.


SECURE 2.0 was included in the Consolidated Appropriations Act of 2023 that President Biden signed into law at the end of December 2022.

SECURE 2.0 made various changes to the retirement plan rules. Many of these new rules take effect beginning January 1, 2023.

One of the rule changes now allows Employers to make Employer Roth Contributions to Employee Roth 401(k) Plans. The downside is that those Employer Roth 401(k) Plan Contributions are included in the Taxable Wages (W-2) of the Employee.

Tom Corley is an accountant, financial planner and author of “Rich Kids: How to Raise Our Children to Be Happy and Successful in Life”, “Effort-Less Wealth”, “Change Your Habits Change Your Life”, “Rich Habits Poor Habits” and “Rich Habits: The Daily Success Habits of Wealthy Individuals.”