Tax Smart Real Estate Investors Podcast

Episode 353: The Mega Backdoor Roth 401(k): What High-Income Earners Should Know with Alex Savage

Released: November 11, 2025 | Host: Hall CPA | Guest: Alex Savage

Episode Overview

This episode dives deeply into the Mega Backdoor Roth 401(k) strategy—what it is, who should consider it, and how it can form part of a comprehensive tax strategy for high-income earners and real estate investors. Host Hall CPA, joined by Nathan Sosa and tax strategist Alex Savage, breaks down the mechanics, advantages, limitations, and ideal scenarios for utilizing the Mega Backdoor Roth 401(k). The conversation is real-world, actionable, and emphasizes using retirement accounts as one of many tools in the financial optimization toolbox, especially for those balancing real estate and equity investments.

Key Discussion Points & Insights

1. Traditional vs Roth Retirement Accounts

[02:06] – [02:48]

• Traditional Accounts: Pre-tax contributions, tax deduction today, taxed upon withdrawal.
• Roth Accounts: After-tax contributions, no immediate tax deduction, but tax-free withdrawals (including earnings) in retirement.

Alex Savage:

“The Roth, right, on the other hand, is after tax. So it is going to be taxed today, hopefully. Right. We get tax free growth. And when you take it out...it’s going to be tax free.” (02:34)

2. Advantages of Roth Accounts

[02:48] – [05:29]

• Access to contributions any time (no 10% penalty for contributions).
• No Required Minimum Distributions (RMDs) for Roths.
• Insulation from rising future tax rates.
• Can help keep Adjusted Gross Income (AGI) low during retirement, maximizing Social Security and Medicare benefits.
• Beneficial for estate planning; heirs receive funds tax-free (must withdraw within 10 years).
• Strategic for real estate investors: Allows for manipulation of AGI to qualify for certain passive loss allowances even in retirement.

Alex Savage:

“With Roth qualified accounts, no RMDs. Roths also are going to give you security in terms of what happens with future tax rates...the consensus is higher because they need to raise revenues.” (03:17)

3. Who Is the Mega Backdoor Roth 401(k) For?

[05:58] – [07:07]

• Ideal Candidates: High-income W2 earners, super savers, solopreneurs (Schedule C or S-Corp without employees).
• Harder for: Small business owners with non-owner employees (due to testing rules).
• “Mega” refers to the increased contribution limits compared to a standard backdoor Roth IRA.

Alex Savage:

“This mega backdoor Roth 401k strategy in particular is definitely going to be for the higher income earners or the super savers.” (05:58)

4. How Much Can You Contribute? Why Is It ‘Mega’?

[07:19] – [09:46]

• Standard IRA: $7,000–$8,000 per year.
• Mega Backdoor Roth: Up to $70,000 per year into a 401(k), including after-tax contributions, if plan allows.
• Allows for much larger Roth contributions than typical ‘backdoor’ strategies.

Example given:

• $23,500 pre-tax (employee deferral)
• $10,000 employer match
• $34,500 remaining as after-tax (converted to Roth)
• Potentially up to $70,000/year if combined strategies are possible.

Alex Savage:

“We’re talking about maybe getting potentially 30, 40 plus thousand into after tax Roth qualified account.” (07:36)

5. How the Mega Backdoor Roth Works: The Mechanics

[09:46] – [10:40]

• After-tax contributions are made to the 401(k).
• Can be converted to Roth inside the plan (in-plan conversion) or distributed to a Roth IRA (if plan permits).
• Some plans allow self-direction of these funds for real estate or alternative investments.

Alex Savage:

“The after tax contribution would stay in the plan...be recategorized to Roth...Or you can do an in service distribution to put [it] into your Roth IRA...That would be ideal.” (10:10)

6. Who Should NOT Use the Mega Backdoor Roth?

[11:00] – [12:30]

• Aggressive real estate portfolio builders who need liquidity today.
• Those in lower tax brackets who benefit from 0% capital gains/outside normal brokerage accounts.
• FIRE (Financial Independence, Retire Early) adherents—benefits are most pronounced for traditional retirees, estate planners, and those seeking post-retirement tax flexibility.

Alex Savage:

“If you are in aggressive rental portfolio growth mode...your liquidity might want to go into rental real estate...If you’re pursuing early, that fire movement...this probably doesn’t make a whole lot of sense for you.” (11:00)

7. Combining Employer and Self-Employed Strategies

[12:43] – [14:41]

• If both spouses are high-income W2 earners, each can maximize contributions.
• If you have a W2 and a business (side hustle/consulting/1099), both plan types can be utilized:
  • 401(k) at W2 job: Full employee deferral and after-tax up to plan cap.
  • Solo 401(k) at side business: Only one employee deferral allowed across all plans, but business profit-sharing and after-tax contributions are additional.

Alex Savage:

“These two plans that you’re going to have in terms of your employer and you being the business owner are not related, they’re not a controlled group...You can double dip.” (13:11)

8. IRS Rules, Risks, and Control Group Issues

[15:50] – [16:49]

• Multiple businesses: If you have “control group” companies, you can’t open separate Mega Backdoor Roth plans (must be unrelated).
• Multiple W2 jobs: Typically allowed unless companies are part of a controlled group.
• It’s crucial to understand if your situation will trigger these rules before acting.

Alex Savage:

“We can’t set up different plans for each one of your businesses and do this exact strategy for each...They can’t be again, in part of that control group.” (15:50)

9. Mega Backdoor Roth vs. Real Estate: Which Should You Choose?

[16:49] – [19:11]

• The podcast acknowledges many listeners are real estate “purists.”
• Mega Backdoor Roth is not a replacement for real estate, but a complementary strategy; helps diversify, provides options when real estate deals are hard to find, and is potentially a backup if market conditions shift.
• Equities in retirement accounts have made many people wealthy—don’t ignore non-real estate asset classes.
• If you want to invest in equities tax efficiently, this is one of the best vehicles.

Hall CPA:

“There’s nothing wrong with real estate, but sometimes you have to look just above and beyond real estate...If you say yes [to equities], then we know that investing in retirement accounts is one of the most tax efficient ways to invest in equities.” (18:19)

10. Notable Quotes & Moments

• On passing wealth to heirs:

  “If that’s your one takeaway: how can I tax efficiently pass on money to my heirs...this is again a great backup, great option here for you.” – Alex Savage (19:12)

• On setting up for year-end (W2):

  “Typically this time of year right towards year end is bonus season. So we may need to utilize that bonus to make that after tax contribution so it comes out of your payroll that way. It does need to be made in this tax year.” (20:25)

• On timing for business owners:

  “Business owners, they will be slightly different. You have up until you file your tax return to make the after tax contribution to your plan.” (21:29)

Key Timelines & Action Steps

• [20:25] W2 Employees: Must make after-tax contributions before December 31st.
• [21:29] Business Owners/Solo 401k: Can make after-tax contributions up to when you file your tax return (plus extensions).
• [22:06 – 24:26] Planning: Must consider plan design, controlled group status, contribution limits, personal financial needs, and seek professional guidance.

Must-Seek Professional Guidance

[22:50] – [24:49]

• This strategy requires careful planning—coordinate with a tax advisor, financial planner, and possibly your HR/plan administrator before executing.
• Do not rely solely on online advice or self-research (“don’t just ask ChatGPT!”).
• Understand opportunity costs—you may lose out on real estate returns if you overcommit to retirement accounts, unless self-directing.

Final Takeaways

• The Mega Backdoor Roth 401(k) is a niche, highly effective strategy mainly for high-income individuals or super savers, providing significant long-term and estate-tax advantages.
• It is not universal; real estate investment may provide better immediate tax benefits for certain investors.
• Use this as a tool in your “tool belt”—it may become invaluable as market and personal conditions change.
• Tax strategy should be comprehensive: Include personal goals, family/legacy planning, diversification, and liquidity.
• Always consult qualified professionals before making use of advanced retirement account strategies.

Memorable Quotes

• “I like tools in the tool belt. There might be a year where rates spike up and it’s hard to go find deals…It's always good to have backup strategies.” – Alex Savage (17:35)
• “This strategy is a way to really turbocharge your tax-advantaged investment in equities...That’s why it’s called mega.” – Hall CPA (18:19)

Quick Reference: Timestamps for Key Segments

• 02:06 – Traditional vs. Roth explained
• 03:17 – Future tax rates and Roth advantages
• 07:19 – What makes the Mega Backdoor strategy “mega”?
• 09:46 – Money flow/mechanics of Mega Backdoor Roth
• 12:43 – Combining W2 and self-employed plans
• 15:50 – Control group rules & IRS risks
• 20:25 – Year-end deadlines for contributions
• 22:50 – The importance of professional advice

Conclusion

This episode delivers a thorough, practical breakdown of the Mega Backdoor Roth 401(k)—a high-level retirement strategy best suited for specific investor profiles. The hosts emphasize that, while powerful, it must be approached thoughtfully, ideally as part of a broader strategy that includes real estate and tax efficiency considerations. The clear message: consult your advisors before acting, leverage all tools at your disposal, and ensure each fits your overall strategy and life goals.