Mega Backdoor Roth Contribution Sequence
Use unused plan capacity to move after-tax contributions into a Roth bucket
- Difficulty
- Advanced
- Time to result
- ~weeks to results
- Steps
- 5
- Confidence
- 98%
The sequence starts with the annual total contribution capacity of an employer retirement plan. Employee pre-tax contributions and the employer match are added together and subtracted from that total. If the plan allows it, the unused capacity can receive an after-tax contribution. Because that principal has already been taxed, it can then be converted into the Roth side of the plan without taxing the same money twice. This creates both pre-tax and tax-free retirement balances and extends the three-bucket diversification approach. The episode distinguishes this step from converting existing pre-tax assets: money that previously generated a deduction is taxable when converted to Roth. Execution therefore depends on confirming plan features, calculating the remaining capacity correctly, and identifying whether each dollar being converted is after-tax or pre-tax.
Origin
Extracted from Masters in Business
Core principles
- 01The employer plan must permit the strategy
- 02Total plan capacity includes employee and employer contributions
- 03After-tax principal can be converted without being taxed twice
- 04Pre-tax conversions are taxable
How to run it
- 1
Verify plan support
Ask HR, the CFO, or the plan administrator whether the plan permits after-tax contributions and Roth conversion. Without those features, the sequence cannot operate as described.
Pro tip High earners with influence at work can ask whether the feature can be added.
Watch out Do not assume every 401(k) supports the strategy.
- 2
Set the total contribution limit
Use the plan's applicable annual total contribution limit. The episode uses the 2025 limit of $70,000 as its example.
Watch out Limits change, so verify the figure for the relevant year.
- 3
Count existing contributions
Add the employee contribution and employer contribution already scheduled or made. These amounts consume part of the total capacity.
Pro tip Include the employer match before calculating unused room.
Watch out Ignoring employer contributions can overstate the remaining capacity.
- 4
Fund the unused capacity after tax
Subtract existing contributions from the total limit and contribute the eligible remainder on an after-tax basis. Keep the contribution type clear in the plan records.
Watch out This is an after-tax plan contribution, not an ordinary pre-tax deferral.
- 5
Convert to Roth
Move the after-tax contribution into the Roth bucket using the conversion mechanism supported by the plan. The already-taxed principal is not taxed a second time.
Pro tip Coordinate the mechanics with the plan administrator and a tax professional.
Watch out Converting pre-tax money is a different, taxable transaction.
In the wild
A 50-year-old contributes $30,000 pre-tax and receives a $10,000 employer contribution. Against the episode's $70,000 total 2025 limit, the remaining $30,000 can be contributed after tax if the plan allows it, then converted to Roth.
→ The plan holds $40,000 of pre-tax contributions and $30,000 in the tax-free Roth bucket.
Common mistakes
Skipping the plan-feature check
The strategy depends on the employer plan permitting the necessary after-tax contribution and conversion steps.
Treating all conversions alike
After-tax principal and pre-tax balances have different tax consequences when converted.
Forgetting the employer match
Employer contributions consume part of the total annual plan capacity in the episode's calculation.
Is it for you?
Best for
It is best for high earners whose employer plans support both after-tax contributions and Roth conversion.
Not ideal for
It is not ideal for investors whose plans lack the required features or who need the money for nearer-term spending.
From the transcript
“The limit in twenty twenty five for total four oh one K contributions is seventy grand.”
“When you convert after tax money, you don't pay tax on it. You don't pay tax twice.”
From the episode
At The Money: Tax Management for Investors