Masters in Business: At The Money – The Mega Backdoor Roth
Host: Barry Ritholtz, Bloomberg
Guest: Dan LaRosa, Head of Corporate Retirement Plans, Ritholtz Wealth Management
Date: February 19, 2026
Episode Overview
This episode focuses on demystifying the "Mega Backdoor Roth," a powerful retirement savings strategy that allows high earners to contribute significantly more to Roth retirement accounts than traditional limits allow. Host Barry Ritholtz and retirement plan expert Dan LaRosa explain how this strategy works, which types of firms and individuals can benefit the most, key compliance and administrative considerations, and practical advice for implementation.
Key Discussion Points & Insights
1. What is a Mega Backdoor Roth?
- Traditional 401(k) plans allow employee contributions up to $24,500 (excluding catch-up).
- The Mega Backdoor Roth leverages after-tax contributions to increase total possible contributions up to $72,000 per year (plan year 2026).
- The strategy enables high earners to convert after-tax contributions into Roth dollars inside a 401(k) plan, vastly exceeding the standard limits for Roth IRAs and Roth 401(k)s.
Dan LaRosa [02:14]: “The Mega Backdoor Roth feature just allows you to contribute above and beyond that $24,500 up to potentially $72,000.”
- This approach uses “the same type of strategy that you have in your regular backdoor Roth IRA,” but within the 401(k), with much higher limits.
Notable Quote:
Dan LaRosa [03:25]: “It’s a cheat code. When it works and your plan allows it, there's nothing else out there that’s going to allow you to get that much money… into a qualified retirement account.”
2. Is This IRS-Approved?
- Despite the “backdoor” moniker, the Mega Backdoor Roth is fully compliant with IRS regulations—provided the plan allows for it.
- The legitimacy is based on explicit IRS rules; the only challenge is plan design compliance and whether your employer offers it.
Dan LaRosa [03:48]: “It is not a gray area. It is not a loophole. It's completely legit. The rules are actually very much clear. The real challenge is just whether or not your plan allows you to use it.”
3. Employer Issues: Why Don’t More Plans Offer It?
- The feature adds plan design complexity and requires additional compliance testing (especially “top-heavy” testing).
- If only top earners take advantage, the plan may fail nondiscrimination rules, making it infeasible for some firms.
Dan LaRosa [05:14]: “After tax contributions and the in-plan Roth conversions do add some complexity… and that extra compliance testing, if failed, can prevent the whole strategy from working altogether.”
Example Industries
- Well-suited to professional services firms (law, accounting, architecture), tech companies, and any firm where many employees earn $150–$160K+.
- Larger companies with a broad base of contributors can make this work more easily.
4. Who Can Benefit? Solo Practitioners & Contractors
- For one-person or owner-only 401(k) plans (often called solo 401(k)s), the Mega Backdoor Roth is even easier:
- No compliance tests or administrative hurdles when there are no non-owner employees.
- Highly recommended for self-employed professionals and contractors.
Dan LaRosa [11:25]: “Mega Backdoor Roth works perfectly for solo or owner-only 401k plans. There are no compliance tests and headaches or administrative burdens when the plan only covers owners.”
5. How This Works In Practice
Implementation:
- Requires employer adoption and amendments to plan documents to allow both after-tax contributions and in-plan Roth conversions (or in-service rollovers to Roth IRAs).
- Two conversion options:
- In-plan Roth conversion: After-tax dollars stay in the 401(k) as Roth dollars.
- In-service distribution: After-tax dollars rolled over to an outside Roth IRA.
- In-plan Roth conversion is generally simpler and preferred.
Dan LaRosa [09:06]: “For the Mega Backdoor Roth to work, a plan has to allow two things. The first is the ability to make after-tax contributions. And the second is a way to move those after-tax dollars into a Roth account.”
Process for Employees:
- Employees typically request feature adoption via HR or plan administrator.
- No significant added cost, but more administrative work (mainly compliance).
Dan LaRosa [10:42]: “There is no additional cost. You could say there’s a little bit of an additional headache... you’re adding more complexity, another layer of compliance testing… But when it works, it works really well.”
6. Plan Administration: Conversion Timing & Providers
- Conversion frequency depends on the plan provider. Some only allow annual conversions; others (like Fidelity) can process daily, automatic Roth conversions (“Roth sweeps”).
- The more frequent and automated, the better for participants.
Dan LaRosa [11:57]: “…I’ve had the once-a-year manual paper form after-tax conversions, and we now have the daily automatic Roth conversions with Fidelity. And it’s a game changer.”
Providers Supporting Mega Backdoor Roth Features:
- Fidelity: Early leader, supports daily Roth sweeps.
- Schwab, Vanguard: Catching up, especially for larger plans.
Dan LaRosa [14:15]: “More providers are getting better at it… Fidelity just happened to be the first one that was really good at administering it. But other providers are catching up quickly.”
7. When Might This Not Be Appropriate?
- If you need access to your money before age 59 ½, Mega Backdoor Roth isn’t optimal; funds are locked in under retirement plan rules.
- Taxable brokerage accounts offer more liquidity and may be a better choice for short-term needs.
Dan LaRosa [14:59]: “When does a taxable account make more sense? If present-day liquidity is important.”
Required Minimum Distributions (RMDs):
- Recent Change: As of Secure 2.0, there are no longer RMDs for Roth 401(k)s—eliminating a former drawback.
Dan LaRosa [15:45]: “Secure 2.0 removed the RMD requirement from Roth 401ks. So there are no RMD requirements for a Roth 401.”
Memorable Moments & Quotes
-
“It’s a cheat code...there’s nothing else out there that’s going to allow you to get that much money into a qualified retirement account.”
– Dan LaRosa [03:25] -
“If only the owners and highest wage earners are interested in using this feature… it’s not going to work. The company...has to be big enough...not just the top 20% or so using it.”
– Dan LaRosa [06:30] -
“Mega Backdoor Roth works perfectly for solo or owner-only 401k plans. There are no compliance tests and headaches... We’re huge fans.”
– Dan LaRosa [11:25] -
“I’ve had the once-a-year manual paper form after-tax conversions, and we now have the daily automatic Roth conversions with Fidelity. And it’s a game changer.”
– Dan LaRosa [11:57] -
“If your plan offers it and you can afford the extra contributions, my answer is usually: do it.”
– Dan LaRosa [14:59]
Important Timestamps
- [02:14] – Mega Backdoor Roth: What is it?
- [03:25] – The “cheat code” for retirement savings
- [03:48] – IRS approval and legitimacy
- [05:14] – Why employers might resist
- [06:30] – Who it works for: size, “top-heavy” testing
- [08:17] – Which industries and firms benefit
- [09:06] – Steps to implement Mega Backdoor Roth
- [11:25] – Application for solo/self-employed individuals
- [11:57] – Conversion frequency and provider differences
- [14:15] – Providers supporting this feature
- [14:59] – When is a taxable account more appropriate?
- [15:45] – No more RMDs for Roth 401(k)s under Secure 2.0
Final Takeaway
The Mega Backdoor Roth is a powerful but underused tool, offering substantial tax-advantaged retirement savings for high earners—if their employer’s plan supports it. With no more required minimum distributions under current law and the potential for tax-free growth and withdrawals, it’s a compelling option, especially for professional firms, tech companies, and solo practitioners. Employees and entrepreneurs should investigate and advocate for this feature where it makes sense.
Barry Ritholtz [15:58]: “…it sounds like a great opportunity and a lot of people just are unaware of it and are not taking advantage of it. You should look into this… and you have an employer who will work with you to create a better corporate retirement plan.”
Useful Resources
- Ask your HR or plan administrator about after-tax contributions and in-plan Roth conversion features.
- Check with your provider (Fidelity, Vanguard, Schwab, etc.) for current capabilities on Roth conversion automation.
- Consult a qualified financial advisor or tax planner to determine if the Mega Backdoor Roth fits your situation.