Key Takeaways
- It runs through your 401(k): The plan has to allow after-tax contributions and a way to convert them to Roth. It is a different strategy from the backdoor Roth IRA.
- One limit, three buckets: In 2026, your deferrals, your employer's contributions, and any after-tax contributions share one $72,000 limit. The after-tax room is whatever is left.
- Profit sharing likely takes that room: For an owner in a high tax bracket, pre-tax profit sharing defers tax at today's rate. In my view, that usually beats Roth treatment later.
- Staff can limit it: After-tax contributions must pass a nondiscrimination test that Safe Harbor design does not cover. The cleanest fits are owner-only plans and large employer plans that offer the feature.
The mega backdoor Roth lets some people put far more into Roth each year than an IRA allows. Whether it makes sense for you depends on how your 401(k) is built, how you are paid, and whether you have staff.
Virtus Financial Partners is an SEC-registered investment advisor that provides financial planning and investment management for dental professionals. This article explains how the strategy works, how it differs from the backdoor Roth IRA, and where it tends to fit.
What is the difference between a backdoor Roth IRA and a mega backdoor Roth?
The backdoor Roth IRA is for people whose income is too high to contribute to a Roth IRA directly. You make a nondeductible contribution to a traditional IRA and then convert it to Roth. For 2026, the IRA limit is $7,500, plus $1,100 if you are 50 or older. If you hold other pre-tax IRA money, the pro rata rule can make part of the conversion taxable. We cover that in our overview of Roth conversions and the backdoor Roth IRA.
The mega backdoor Roth runs through a 401(k), and your plan has to offer two things:
- After-tax contributions: A third type of employee contribution, separate from pre-tax and Roth deferrals.
- A way to convert them: Either an in-plan Roth conversion, or an in-service withdrawal that lets you move the after-tax money to a Roth IRA while you are still working.
Neither feature is required by law, so a plan may have one, both, or neither. If either is missing, the strategy is not available in that plan. Your plan document, or your third-party administrator (TPA), will tell you.
How much room is there for after-tax contributions?
Contributions to your 401(k) account for the year count toward one limit, called the annual additions limit. For 2026, it is $72,000, or 100% of your compensation if that is lower. Catch-up contributions do not count against it. That is up to $8,000 more if you are 50 or older, or $11,250 if you are 60 through 63.
Three buckets share that $72,000:
- Your deferrals: Pre-tax or Roth, up to $24,500 for 2026.
- Employer money: Safe Harbor contributions and profit sharing.
- After-tax contributions: Whatever room the first two buckets leave.
After-tax contributions are not deferrals, so they do not count against the $24,500. They only count against the $72,000.
How does the after-tax money become Roth?
After-tax contributions come out of your paycheck after income tax, the same way a Roth deferral does. They land in a separate after-tax account inside the plan.
The goal is to move that money to Roth soon after it goes in. You already paid tax on the contribution, so it is not taxed again when you convert. Any earnings on that money before the conversion are taxable when you convert. Converting soon keeps those earnings small.
If your plan lets you withdraw the after-tax money to a Roth IRA instead, the IRS allows a clean split. Under IRS Notice 2014-54, when the money goes out at the same time, the after-tax contributions can go to a Roth IRA and the pre-tax earnings can go to a traditional IRA. That way the earnings stay tax-deferred.
Once the money is in Roth, it grows without tax. Qualified distributions come out tax-free. Generally, that means you are 59½ or older and at least five tax years have passed since your first Roth contribution to that account.
What does the math look like for a practice owner?
Consider a hypothetical owner, Dr. Lee. She pays herself a W-2 of $120,000, defers the full $24,500, and the practice makes a 3% Safe Harbor contribution. There is no profit sharing.
| 2026 contributions for Dr. Lee | Amount |
|---|
| Annual additions limit | $72,000 |
| Employee deferral | $24,500 |
| Safe Harbor contribution (3% of $120,000) | $3,600 |
| Profit sharing | $0 |
| Room left for after-tax contributions | $43,900 |
Hypothetical illustration, not an actual client result. Full assumptions are in the note at the end of this article.
Her $120,000 of pay is above $72,000, so the dollar limit applies. If her deferral is Roth and she converts the full $43,900, that is $68,400 going to Roth in one year. A backdoor Roth IRA allows $7,500.
That $43,900 comes out of her take-home pay after tax. It also has to pass the test described below.
Curious how much after-tax room your own plan leaves you?
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Why would an owner doing profit sharing skip the after-tax bucket?
Profit sharing fills the same $72,000 limit, and it does it with pre-tax dollars the practice can deduct, within IRS limits. Every dollar of profit sharing is a dollar of after-tax room used up.
A pre-tax contribution defers the tax. The money is taxed as income when it comes out in retirement. Still, for an owner in a high bracket, I would usually rather defer tax at today's rate than pay it now for Roth treatment later. That is why an owner who is already doing profit sharing will likely not use the after-tax bucket.
The after-tax bucket earns its place in two situations:
- Your W-2 pay is modest: Profit sharing is tied to your compensation from the practice. If you pay yourself a modest W-2, that can make profit sharing less favorable, and the after-tax bucket can fill the room profit sharing does not.
- You want a large Roth balance: Some owners want more of their savings in Roth and accept paying the tax now to get there.
Whether either applies depends on your pay, your tax bracket now and in retirement, and your plan design. It should be evaluated with your CPA and your retirement plan advisor.
Why can staff limit the owner's after-tax contributions?
After-tax contributions are subject to a nondiscrimination test called the ACP test. It compares the contribution rates of highly compensated employees with everyone else. In this test, a highly compensated employee is generally anyone who owned more than 5% of the practice this year or last year, or who earned more than $160,000 the year before.
Safe Harbor design does not exempt after-tax contributions. Safe Harbor relieves the testing on deferrals and on Safe Harbor matching contributions. After-tax contributions are still tested.
If your staff do not make after-tax contributions too, the staff side of the test is at or near zero. The owner's after-tax contributions can then be limited or eliminated. Amounts over the limit are refunded with their earnings, generally after the plan year ends. Your TPA runs the test.
That test is why I rarely recommend the mega backdoor Roth in a practice with staff.
Where does the mega backdoor Roth tend to fit?
It tends to fit in three places:
- Owner-only plans: If the plan covers only the owner, there are no other employees to test against, and the plan is treated as passing the ACP test. The provider still has to allow after-tax contributions and conversions, and not every owner-only plan does.
- Associates at large employers: If you work for a larger employer, such as a DSO, check whether its plan offers after-tax contributions and a conversion feature. If you are highly compensated, testing can still limit you, and the plan administrator will tell you.
- A spouse with a large company plan: If your spouse works for a company whose plan offers after-tax contributions and a conversion feature, the strategy may fit their plan even if it does not fit yours.
It tends not to fit in a practice with staff that already uses a Safe Harbor 401(k) with profit sharing. In my view, the owner's room is better used pre-tax, and the test works against the owner.
If you are weighing it against other accounts, our savings order of operations walks through where each one fits.
Overall takeaway
The after-tax room in a 401(k) can be large. In a practice with staff, it competes with profit sharing for the same $72,000 and has to pass a test that Safe Harbor does not cover. In my opinion, profit sharing is the better use of that room for an owner with staff. If you have no staff, or you or your spouse work for an employer whose plan offers the feature, check the plan document to see whether both features are there.
About this example
Dr. Lee is a hypothetical, not a client. The example assumes 2026 limits, a W-2 of $120,000, a 3% Safe Harbor nonelective contribution, no profit sharing, and no catch-up contributions. It assumes the plan allows after-tax contributions and a Roth conversion, and that the ACP test does not limit her contributions. It assumes no investment returns. Your figures will depend on your plan document, your pay, and your plan's testing.
