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Masters in Business

At The Money: The Mega Backdoor Roth

16 min episode · 2 min read
·
Dan Larosa

Episode

16 min

Read time

2 min

Topics

Personal Finance, Investing, Leadership

AI-Generated Summary

Key Takeaways

  • Contribution ceiling: The Mega Backdoor Roth raises total annual 401(k) Roth contributions from $24,500 to $72,000 by allowing after-tax contributions beyond standard limits. The strategy is IRS-approved, not a gray area, and works identically inside a 401(k) as a traditional backdoor Roth IRA.
  • Employer eligibility test: The strategy fails compliance testing if only owners and top earners participate. Plans work best at companies where a large percentage of employees earn over $150,000–$160,000 annually — tech firms and professional services firms like law, accounting, and medicine are prime candidates.
  • Solo practitioners get the easiest path: Self-employed individuals with owner-only 401(k) plans face zero compliance testing requirements, making the Mega Backdoor Roth straightforward to implement. Solo practitioners should prioritize setting this up, as there are no administrative hurdles that exist in multi-employee plans.
  • Automation is the key operational step: Fidelity offers daily automatic Roth conversion sweeps, eliminating manual tracking. Employees must activate this feature themselves. Other major providers including Schwab and Vanguard are catching up. Confirm sweep availability with your provider before making after-tax contributions to avoid misallocated funds.

What It Covers

Dan LaRosa, retirement plan expert at Ritholtz Wealth Management, explains the Mega Backdoor Roth — a fully IRS-approved strategy allowing contributions up to $72,000 annually into a Roth account, tripling standard 401(k) limits for eligible employees and self-employed individuals.

Key Questions Answered

  • Contribution ceiling: The Mega Backdoor Roth raises total annual 401(k) Roth contributions from $24,500 to $72,000 by allowing after-tax contributions beyond standard limits. The strategy is IRS-approved, not a gray area, and works identically inside a 401(k) as a traditional backdoor Roth IRA.
  • Employer eligibility test: The strategy fails compliance testing if only owners and top earners participate. Plans work best at companies where a large percentage of employees earn over $150,000–$160,000 annually — tech firms and professional services firms like law, accounting, and medicine are prime candidates.
  • Solo practitioners get the easiest path: Self-employed individuals with owner-only 401(k) plans face zero compliance testing requirements, making the Mega Backdoor Roth straightforward to implement. Solo practitioners should prioritize setting this up, as there are no administrative hurdles that exist in multi-employee plans.
  • Automation is the key operational step: Fidelity offers daily automatic Roth conversion sweeps, eliminating manual tracking. Employees must activate this feature themselves. Other major providers including Schwab and Vanguard are catching up. Confirm sweep availability with your provider before making after-tax contributions to avoid misallocated funds.

Notable Moment

Under SECURE 2.0 legislation, Roth 401(k) accounts — including those funded via Mega Backdoor contributions — no longer carry required minimum distribution rules, eliminating a major drawback that previously distinguished them from Roth IRAs.

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Episode Transcript

This message is brought to you by Apple Card. It's a great time to apply for an Apple Card. You'll love earning unlimited daily cash on every purchase. That includes 3% daily cash when you buy the latest iPhone, AirPods, and Apple Watch at Apple. Through this special referral offer, when you get a new Apple Card, you can earn bonus daily cash. To qualify, apply at apple.co/ get daily cash. Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Offer may not be available elsewhere. Terms and limitations apply. There's a fire inside you you can't ignore. Stand still? Not a chance. You're a lifelong learner who's come this far. Now we are here to help you keep going further. Capella University. What can't you do? Visit capella.edu to learn more. This is Jacob Goldstein from What's Your Problem? When you buy business software from lots of vendors, the costs add up, and it gets complicated and confusing. Odoo solves this. It's a single company that sells a suite of enterprise apps that handles everything from accounting to inventory to sales. Odoo is all connected on a single platform in a simple and affordable way. You can save money without missing out on the features you need. Check out Odoo at odoo.com. That's odoo.com. Bloomberg Audio Studios. Podcasts, radio, news. Tax deferred portfolios, also known as qualified accounts, have become one of the most popular ways to invest. There are about a 100,000,000 households, nearly 75% of of every household in America, with some sort of a formal tax advantage retirement savings. Total defined contributions are nearly $14,000,000,000,000. The latest addition in your tax deferred portfolio choices is the mega backdoor Roth. To help us unpack all of this and what it means for your retirement savings, let's bring in Dan LaRosa. He's an expert, in qualified retirement accounts and works with clients all over the country. And full disclosure, Dan leads the corporate retirement plans, at my firm, Rehilts Wealth Management, and is one of my partners. So let's start with the basics. Most of our listeners are certainly familiar with four zero one k's, and they're probably familiar with variations such as a Roth four zero one k or a Roth IRA. What is a mega backdoor Roth? So a regular four zero one k allows you to contribute up to 24 and a half thousand dollars into it. Right? The mega backdoor Roth feature just allows you to contribute above and beyond that 24 and a half thousand dollars up to potentially $72,000. So it uses the same type of strategy that you have in your regular backdoor Roth IRA. Right? That's just the way for high earners to get money into a Roth account. They're gonna make a nondeductible contribution to a traditional IRA and then convert that to a Roth IRA. It works. It's great, but the dollar amount is is pretty small. Right? It's $7,500. The mega backdoor Roth, uses …

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Books, tools, and gear mentioned in this episode

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Tools

  • FidelityRecommended

    by Fidelity Investments

    Fidelity offers daily automatic Roth conversion sweeps, eliminating manual tracking. Employees must activate this feature themselves.
  • by Apple

    Apple Card listed as a sponsor of the episode
  • Odoo listed as a sponsor of the episode

company

  • Other major providers including Schwab and Vanguard are catching up.
  • Other major providers including Schwab and Vanguard are catching up.

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