IRA Financial Blog

Mega Backdoor Roth Solo 401(k) – This is What You Need to Know

mega backdoor Roth Solo 401(k)

The mega backdoor Roth Solo 401(k) plan strategy is the holy grail of Roth tax planning.  The mega backdoor Roth strategy is the only strategy that will allow a self-employed individual or small business owner with no employees to contribute up to $61,000 (or $67,500 if age 50+) in 2022 in a Roth and potentially get immediate access to the cash.  In contrast, a Roth IRA contribution maximum contribution limit is $6,000 or $7,000 if age 50+, which is subject to income limitations.

Key Points
  • The Solo 401(k) is the best retirement plan for the self-employed
  • The Roth allows for tax-free withdrawals
  • The Mega Backdoor Roth allows one to supercharge his or her tax-free retirement

Solo 401(k) Eligibility

The Solo 401(k) is like a traditional 401(k) Plan. The only difference is it covers one employee and/or a spouse. The Solo 401(k) has instantly become the number one retirement plan for self-employed and small business owners. To become Solo 401(k) eligible, one must not have any employees that work over 1000 hours and are non-owners. So long as the business does not have any non-owner, full-time employees, the owner(s) and spouse(s) can establish a Solo 401(k) plan for the business.

Solo 401(k) plan Contribution Rules

Internal Revenue Code (IRC) Section 402g imposes a per individual limit of $20,500 or $27,000 for individuals at least age 50 for employee deferral contributions in 2022. Employee deferral contributions can be made in pretax or Roth, if the plan document permits. Employee deferral contributions are made dollar for dollar and are not based on a percentage of income. Whereas, employer profit sharing contributions can be made to the plan in an amount up to 25% of the participant’s self-employment compensation (20% in the case of a sole proprietorship or single member LLC).  Employer profit sharing contributions must be made in pretax.  Pursuant to IRC 415, the aggregate limit for employee and employer contributions cannot exceed $61,000 or $67,500 if at least 50 for 2022.

For example, a self-employed individual under the age of 50 who makes $70,000 of income would be able to contribute $20,500 as an employee deferral, in pretax or Roth, and 20% of his or her compensation or $14,000 as a pretax employer profit sharing contribution, providing him or her with an aggregate plan contribution of  $34,500.

What if I told you that you can contribute $61,000 with just over $69,000 of income and it all can be Roth?  Welcome to the mega backdoor Roth Solo 401(k) strategy.

After-Tax Contributions

After-tax contributions are not considered pretax or Roth.  After-tax contributions are not tax deductible and the earnings are subject to tax.  Hence, not a very popular choice for retirement investors when compared to a pretax or Roth option. However, in the mega backdoor Roth 401(k) strategy, after-tax contributions play a very important role.

The benefit of making after-tax contributions and using the mega backdoor Roth strategy versus a typical mixture of employee deferral and profit sharing contribution is that one can make a dollar for dollar contribution up to $61,000 or $67,500 for 2022, versus an employee deferral up to $20,500 or $27,000, plus a profit sharing contribution, which is based off a percentage of your compensation (20% or 25%).

In other words, one can reach the maximum 2022 plan contribution limits with less income with the mega backdoor Roth strategy then by using a mix of employee deferral and employer profit sharing contributions. Unfortunately, not all Solo 401(k) plans allow for after-tax contributions

Learn More: Importance of Investment Diversity

Mega Backdoor Roth Solo 401(k) Strategy

Under the mega backdoor Roth strategy, a Solo 401(k) plan participant can make after-tax contributions up to a maximum of $61,000 or $67,500, if at least age 50.  The plan participant must have sufficient earned income (Schedule C net income) to make the after-tax contribution. One cannot contribute to a plan more than they earn, so it is important that the plan participant only contribute what he or she is allowed. For example, if a plan participant made net $50,000 on her Schedule C, the after-tax contributions could not exceed that amount. Note – you may not be able to contribute the entire amount earned as income as the contribution must be net of social security and Medicare taxes.

Assuming the plan participant had $70,000 of net Schedule C income, she would be able to do an after-tax Solo 401(k) plan contribution of $63,000 in 2022. The plan participant would then immediately roll the after-tax funds to an after-tax IRA and then immediately convert the funds to a Roth IRA.  After-tax contributions are not considered employee deferral or employer profit sharing contributions and are, thus, not subject to the 401(k) plan triggering rules.  The plan triggering rules essentially restrict a plan participant from rolling over 401(k) plan funds to an IRA or another plan or taking a distribution, except for certain hardship exceptions, until they reach the age of 59 1/2, their job is terminated, or the plan is terminated.

Roth IRA Distribution Rules

Prior to IRS Notice 2014-54, doing a mega backdoor Roth IRA was not as attractive as there was some uncertainty as to how the after-tax 401(k) funds can be rolled over to a Roth IRA. Notice 2014-54 clarified this rule and allowed the pretax and after-tax funds that were distributed from a plan on a pro-rated basis to be separated once a distribution is made. 

Therefore, the Notice opened the door to the mega backdoor Roth 401(k) strategy.  Under the mega backdoor Roth strategy, one can maximize their 401(k) plan Roth contributions as well as gain investment options through flexible rollover rules.  Essentially, a plan participant can contribute up to $61,000 or $67,500 in after-tax funds to a 401(k), immediately roll those funds to an IRA, and then convert them to a Roth IRA without tax.  Even better, the individual can gain investment options through a Roth IRA and even gain the ability to use those funds immediately without being over the age of 59 1/2 or satisfying the Roth five-year rule.

In general, in order to take funds out of a Roth IRA tax-free the distribution must be deemed a qualified distribution.  A qualified distribution is when the Roth IRA has been opened at least five years and the Roth IRA owner is over the age of 59 1/2. The five-year clock starts with your first contribution to any Roth IRA. If you satisfy the qualified Roth IRA distribution rules, Roth IRA distributions of contributions and earnings will be tax-free.  However, contributions to a Roth IRA can always be taken anytime as a tax-free distribution.  Note, the five-year rule for a 401(k) plan is counted separately from the 5-year rule for any/all Roth IRAs.

Distributing a Conversion

Roth IRA distribution rules on conversions are somewhat different than distributions on Roth IRA contributions. With respect to Roth IRA conversions, the conversion ordering rules hold that distributions are first made form after-tax contributions, then conversions, and finally earnings. Also, each Roth IRA conversion has its own five-year period. 

In the case of a mega backdoor Roth IRA strategy, once the after-tax IRA funds are converted to Roth, they can actually be taken as a distribution without satisfying the five-year rule since the conversion came from after-tax funds.  Whereas, if the converted funds came from earnings, the five-year rule would apply even to a distribution on the converted amount, unless the individual was over the age of 59 1/2.  Note – the five-year rule and over 59 1/2 requirement would apply to a distribution on the earnings from the amount converted.


The mega backdoor Roth Solo 401(k) strategy is a great strategy for maximizing ones Roth contributions and gaining investment control or even personal use of the funds through a Roth IRA.  Below is a summary of how the mega backdoor Roth strategy works:

  • Establish a Solo 401(k) plan. Must be self-employed or have a small business with no full-time employees. Also, must confirm that the plan allows for after-tax contributions
  • Make after-tax contributions to the Solo 401(k) plan up to $57,000 ($63,500 if at least age 50). Contributions can be made dollar-for dollar. Just make sure you have sufficient earned income (Schedule C or W-2). Passive income, such as rental income, capital gains, interest is not eligible for plan contributions.
  • Establish traditional after-tax IRA and rollover 401(k) funds to the IRA. Thanks to IRS Notice 2014-54 this is now allowed. No 401(k) plan triggering event is required for after-tax plan contributions, unlike employee deferrals or employer profit sharing contributions.
  • Convert after-tax IRA funds received from after-tax 401(k) rollover to a Roth IRA. There should be no tax on conversion if after-tax contributions have not generated any earnings. The IRA custodian will report the conversion to the IRS.
  • After-tax funds are now in a Roth IRA and can be invested or distributed.

The mega backdoor Roth Solo 401(k) is not widely known but should be.  The strategy can help Roth lovers supercharge their Roth accounts and at the same time provide greater investment and distribution options.

To learn more, please contact a Solo 401(k) plan specialist at 800-472-0646.


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