Mega Backdoor Roth 401(k) Strategies for Executives and Highly Compensated Employees

As a plan sponsor, one of your primary objectives is to provide a retirement plan that not only attracts and retains top talent but also offers meaningful value to all employees, including high-income earners. For executives and highly compensated employees, traditional contribution limits can restrict their ability to save adequately for retirement in a tax-advantaged manner. The Mega Backdoor Roth 401(k) strategy presents a powerful solution.

A Mega Backdoor Roth IRA 401 (k) strategy enables participants to contribute significantly more to a Roth account than standard limits allow. By understanding and potentially incorporating this feature, you can enhance your benefits package, providing a critical tool for your key employees to maximize their retirement savings.

This article provides a comprehensive overview of the Mega Backdoor Roth 401(k), including its mechanics, benefits, and key considerations for plan sponsors.

What is a Mega Backdoor Roth 401(k)?

The Mega Backdoor Roth 401(k) is an advanced retirement savings strategy that leverages a specific provision in some 401(k) plans. It involves making non-deductible, after-tax contributions to a 401(k) account and subsequently converting those funds into a Roth 401(k) or a Roth IRA. This process allows participants to bypass the income limitations and lower contribution caps associated with direct Roth IRA contributions.

This strategy is particularly valuable for individuals who meet the following criteria:

• They consistently contribute the maximum amount to their pre-tax or Roth 401(k) ($23,500 for 2026, plus a $7,500 catch-up contribution for those age 50 and over).
• Their income level makes them ineligible to contribute directly to a Roth IRA.
• They have additional capital they wish to invest for retirement in a tax-advantaged vehicle.

By enabling this strategy, you provide a compliant pathway for high-income employees to build a substantial source of tax-free income in retirement.

How does a Mega Backdoor Roth 401(k) work?

Executing a Mega Backdoor Roth 401(k) contribution involves a distinct, multi-step process. The feasibility of this strategy is entirely dependent on the specific rules established in your plan document.

1. Confirm plan document provisions

The foundational requirement is that your 401(k) plan must explicitly permit two key actions:

After-tax contributions

The plan must allow employees to contribute after-tax dollars beyond the standard employee deferral limits. This is separate from both pre-tax and Roth 401(k) contributions.

Conversion or rollover options

The plan must also allow for either in-plan Roth conversions (moving the after-tax money into the Roth 401(k) portion of the plan) or in-service withdrawals (allowing the employee to roll the after-tax funds into an external Roth IRA while still employed).

Without both of these provisions, the strategy is not possible. Plan sponsors should consult with their third-party administrator (TPA) or recordkeeper to confirm their plan's features or to discuss amending the plan document to include them.

2. Make after-tax contributions

Once an employee has maxed out their standard 401(k) contributions, they can begin making after-tax contributions. The total amount that can be contributed to a 401(k) from all sources—employee deferrals (pre-tax and Roth), employer contributions (match and profit sharing), and after-tax contributions—is governed by the IRS Section 415(c) limit.

2026 contribution limits

For 2026, this overall contribution limit is $69,000, or $76,500 for participants age 50 and over.

For example, consider a 45-year-old employee who contributes the maximum $23,000 to their 401(k). If their employer contributes a $10,000 match, the total contributions so far are $33,000. This leaves $36,000 ($69,000 - $33,000) of available space that the employee can fill with after-tax contributions.

3. Convert funds into a Roth account

The final step is to move the after-tax contributions into a Roth account to secure tax-free growth. This is typically done in one of two ways:

In-plan Roth IRA conversion

The employee directs the plan administrator to move the after-tax contributions from their traditional 401(k) sub-account to their Roth 401(k) sub-account. This is the most streamlined option if the plan allows it.

In-service rollover to a Roth IRA

If the plan permits in-service withdrawals, the employee can roll their after-tax contributions directly into an external Roth IRA. This achieves the same tax outcome but moves the assets outside of the employer-sponsored plan.

It is crucial for the conversion to happen as quickly as possible after the contribution is made. Any earnings that accumulate on the after-tax contributions before the conversion are taxable as ordinary income at the time of the conversion.

What are the benefits a Mega Backdoor Roth 401(k)?

Offering the Mega Backdoor Roth 401(k) option significantly enhances the value of your retirement plan for key employees.

Tax-free growth

Once funds are in a Roth account, all subsequent investment growth and qualified withdrawals in retirement are completely tax-free. This is a substantial benefit compared to the tax-deferred growth of traditional 401(k)s, which requires taxes to be paid upon withdrawal.

No income limits

Unlike direct Roth IRA contributions, which are phased out for high-income earners, this strategy is available to any employee participating in a plan that offers the required features, regardless of their income.

Massive contribution potential

The strategy allows employees to contribute well beyond the standard 401(k) and IRA limits. The ability to add tens of thousands of extra dollars to a tax-free retirement vehicle is a game-changer for wealth accumulation.

Key points for plan sponsors considering a Mega Backdoor Roth IRA 401 (k)

While powerful, implementing this feature requires careful consideration of its administrative and compliance implications.

Plan restrictions

The most significant barrier is the plan document itself. Many plans do not automatically include the necessary provisions. Amending a plan to add after-tax contributions and in-plan conversions requires coordination with your TPA and recordkeeper.

The pro-rata rule

This rule can create tax complications if an employee rolls funds into an external Roth IRA and has other, pre-tax IRA assets. The rule requires that the conversion be taxed proportionally based on the ratio of pre-tax to after-tax money across all of the individual's traditional IRAs. However, this rule does not apply to in-plan Roth conversions, making them a simpler option for many participants.

Tax timing and administration

To minimize the tax liability on earnings, conversions should be processed quickly. This may require your recordkeeper to support automated or frequent conversions. Clear communication with employees about the tax implications of delaying conversions is essential.

Compliance testing

After-tax contributions are subject to nondiscrimination testing (the ACP test). A sudden influx of after-tax contributions from highly compensated employees (HCEs) could potentially cause the plan to fail its testing. It is vital to model the potential impact with your TPA before implementing this feature.

Is the Mega Backdoor Roth IRA 401(k) right for your plan?

The Mega Backdoor Roth IRA 401(k) is an exceptional tool for employers looking to provide maximum value to high-income earners. It is an ideal feature for plans sponsored by organizations that:

• Employ a significant number of HCEs who are likely to max out their standard retirement contributions.
• Wish to create a more competitive and attractive executive benefits package to aid in recruitment and retention.
• Are prepared for the administrative and compliance oversight required to manage the feature effectively.

By working closely with your financial advisor and TPA, you can determine if adding this functionality aligns with your company's goals and enhances your overall benefits strategy, further empowering your employees to achieve financial security in retirement.

Learn more about Mega Backdoor Roth 401(k) strategies

Risk Strategies Retirement Plan Services specializes in delivering tailored corporate retirement plan solutions that help businesses reduce fiduciary risk, streamline plan administration, and enhance employee retirement outcomes. Whether you're a small business looking for your first plan or a growing company seeking a more cost-effective and compliant strategy, our team brings deep expertise, transparent pricing, and hands-on support every step of the way.

For more information, connect with a retirement plan specialist.