The Mega Backdoor Roth Solo 401k Explained

Open a solo 401k plan online in under 10 minutes – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a mega backdoor Roth conversion with a few clicks.

The mega backdoor Roth strategy using a solo 401k allows you to supersize your Roth solo 401k contributions each year.

With a solo 401k plan, you’re allowed to contribute up to 100% of your employee income, up to a maximum of $23,000 in 2024 into a Roth solo 401k. If you’ll be at least 50 years of age by December 31, 2024, you can contribute up to $30,500. Using a mega backdoor Roth strategy with the solo 401k, you’re able to contribute up to $69,000 entirely into a Roth solo 401k.

Here’s how it works.

Context around how the solo 401k works

There are a lot of moving parts to a mega backdoor Roth strategy and it can get a little confusing if we dive straight in. Before we break down how it works, let’s cover the essential elements of a solo 401k plan for some context.

In 2024, the solo 401k contribution limit is $69,000 ($76,500 if you’re 50 years of age or older).

You can contribute as both the employer and the employee and can choose whether you contribute into a traditional solo 401k account or a Roth solo 401k account.

Only the employee side is given the option for Roth contributions. Employers must contribute to a traditional solo 401k.

Here’s how that’s broken down:

That means that with the normal solo 401k limits, you get to put away a maximum of $23,000 ($30,500 if you’re over 50) into your Roth solo 401k account for 2024. The remaining room left over must be contributed with employer compensation calculated at 25% of income. But remember that employers can only contribute to a traditional pre-tax account; they do not have the option to contribute to a Roth account.

How a mega backdoor Roth strategy works with a solo 401k

Now let’s see what happens when we use the mega backdoor Roth strategy for our solo 401k. Remember that with our solo 401k, we either contributed to a traditional pre-tax account or a Roth account.

To make this strategy work, we’ll need to make use of another account: The After-Tax Account.

Yes, the Roth account is funded with after-tax dollars as well, but these are TWO SEPARATE accounts and not related to each other. In an after-tax account, contributions are not tax deductible AND earnings are taxed. In other words, you don’t get a tax deduction when you contribute, and there is no tax-free compounding so you pay taxes on any gains. If your account makes money, that money gets taxed – even though you funded the account with after-tax dollars.

This typically makes after-tax contributions an unpopular choice over a traditional or Roth solo 401k. Its only use is as a vehicle to help us implement the mega backdoor Roth strategy, since it’s the only other way to get more money into your solo 401k. And you could choose to do this in two different ways: The entire amount, minus employer contributions, or just the difference.

Minus employer contributions

Maximize employee contributions into the Roth solo 401k, and then contribute the rest with after-tax contributions.

Let’s say that you contributed the full amount of $23,000 in employee deferrals into a Roth solo 401k. Since the 2024 solo 401k contribution limit is $69,000 that leaves you with $46,000 left over in contribution room.

Remember that employer contributions for a solo 401k are calculated by 25% of income (~20% if you’re a sole proprietorship, partnership, or LLC taxed as a sole proprietorship). If you were to contribute that amount with employer contributions, you would need an income of $184,000 (25% of $184,000 is $46,000). If you use the mega backdoor Roth strategy, you could only need $46,000 in after-tax contributions. Not only that, but the entire amount can get converted into your Roth solo 401k.

Just the difference

Max out your employee deferrals and employer contributions and fill the rest with after-tax contributions.

Remember in our calculation above, we concluded that you’d need to make at least $184,000 in order to maximize your 2024 contributions.

$23,000 would be made with employee deferrals, and the remaining would get filled using 25% of your income.

But what if you only made $100,000?

$23,000 would get contributed from the employee side, and 25% ($25,000) would get contributed from the employer side.

That’s a total of just $48,000 and you still have $21,000 ($69,000 – $48,000) left over in contribution room.

Using the mega backdoor Roth strategy, you could contribute the remainder with after-tax contributions. And then it would all be transferred into a Roth solo 401k account.

How the funds get transferred into a Roth account

There are two different ways that the after-tax contributions are moved into a Roth account.

Both transfers are tax-free. Because you contributed with after-tax dollars, the IRS doesn’t require you to pay any taxes on conversions to a Roth account.

Which one should I choose?

It depends on what you want to do with the money. The Roth IRA has slightly different rules than a Roth solo 401k.

Key differences between a Roth IRA and a Roth solo 401k:

You might choose to do a rollover into a Roth IRA if you want avoid an RMD and keep your nest egg compounding until well you’re after 73, or if you want to withdraw the money earlier without penalty.

How do I get started with the mega backdoor Roth strategy?

To be able to do the mega backdoor Roth strategy, you need three things:

As long as your plan provider offers these options, and you make enough money that it makes sense to contribute the maximum, then you’re able to do mega backdoor Roth conversions. Not every solo 401k plan provider offers after-tax contributions or in-service distributions, and is typically only offered by paid solo 401k plan providers. You can compare solo 401k plan providers here.

Here’s what the steps typically look like with most solo 401k providers:

With the Carry Solo 401k Plan, everything can be done online with just a few clicks

The Carry Solo 401k Plan is the easiest way to do a mega backdoor Roth conversion. Learn more about how it works.

Remember that after-tax contributions get taxed on the gains

Any gains in your account are subject to taxes. You should transfer from an after-tax account into a Roth immediately. Do not let it sit because if it starts making money and then you transfer it, it’s a taxable event.

Similar to a “regular” mega backdoor Roth

The mega backdoor Roth strategy is more common with people who have a regular 401k plan at their work.

However, the biggest difference is that since you’re not your own employer, you’re more restricted by the decisions of the company you work for. Many company 401k plans aren’t set up to offer the mega backdoor Roth. With a solo 401k, you have the freedom to choose a plan provider that offers these options.

In addition, with both scenarios, you’re given the same conversion options: Rollover into a Roth IRA or do an in-plan conversion into a Roth 401k. However, the Roth solo 401k gives you complete investment freedom while the regular Roth 401k limits your choices to whatever the company plan offers.

For both regular 401k and solo 401k, the mega backdoor Roth mechanisms are exactly the same, as are the goals of using the strategy. The goal is to put away as much as you can into a Roth account, which gives you huge tax advantages in retirement.

Why choose to maximize a Roth retirement account?

A Roth account gives you no immediate tax savings, but can save you a fortune in taxes owed when you withdraw in retirement. The beauty of a Roth account is that your money compounds tax-free AND withdrawals in retirement are also tax-free. So if you put in $50,000 and it turns into a $1 billion, you owe zero money to the IRS when you withdraw.

If you purchase a $100,000 property through a solo 401k and it appreciate in value to $2 million, you don’t pay any taxes on the gains. If you purchase a rental property, any rental income you make is all yours. You don’t pay any taxes from rental payments or when you decide to sell that property for a gain.

As you can see, a Roth account can save you a ton in taxes over the years, through the magical combination of tax-free compounding and tax-free withdrawals. Using the mega backdoor Roth strategy with a solo 401k is one of the best methods to maximize your Roth retirement account.

No need to open multiple separate brokerage accounts. Carry’s Solo 401k Plan comes with an integrated investment platform, no-fee robo-advisor, and full support with compliance and plan administration. Learn more here.

Invest more money into alternative assets

Roth retirement accounts are the perfect vehicles for investing into assets with higher growth potential like alternative assets. Instead of a Roth Solo 401k, you could also choose to do a mega backdoor Roth conversion and put the funds into a self-directed Roth IRA, like Carry’s Self-Directed Roth IRA, giving you more capital to make alternative investments into cryptocurrencies, real estate, startups, and more.