The Mega Backdoor Roth Solo 401k Explained

Looking to open a Solo 401k plan? Get started today with just a few clicks – The Carry Solo 401k Plan is a feature-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 within a Solo 401k can allow you maximize your Roth Solo 401k contributions each year.

According to IRS contribution limits in 2025, a Solo 401k plan allows you to contribute up to $23,500 of your employee income to a Roth Solo 401k. If you’ll be at least 50 years of age by December 31, 2025, you can contribute up to $31,000. But with a Mega Backdoor Roth strategy, you can potentially expand that limit all the way up to $70,000 ($77,500 if you’re at least 50 years old) all within a Roth account.

How does it work? Let’s break it down.

How the Solo 401k Works

The Mega Backdoor Roth can be complex. Before breaking it down, let’s cover the basics of a Solo 401k plan so everything makes sense.

In 2025, the total contribution limit for a Solo 401k, combining employee and employer contributions, is $70,000 ($77,500 if you’re 50 years of age or older), up from $69,000 and $76,500 in 2024.

What makes a Solo 401k unique is that you contribute as both the employee and the employer, whether to a Traditional Solo 401k account or a Roth Solo 401k account.

✅ As an employee, you can contribute up to 100% of your income, capped at $23,500 ($31,000 if you’re 50 years of age or older).

✅ As an employer, you can contribute up to 25% of your net income (20% for sole proprietors, partnerships, or LLCs taxed as sole proprietorships).

Now, let’s talk about Traditional vs. Roth Solo 401k accounts:

That means under normal rules, the most you can put into a Roth Solo 401k in 2025 is $70,000 ($77,500 if you’re at least 50 years old). The remaining contribution must come from the employer, calculated at 25% of net adjusted profit.

As of 2022, there is an available option where employers can make a Roth contribution, provided the plan provides it. However, there are still certain issues being discussed regarding the complex process and potential tax implications on employees.

How the Mega Backdoor Roth Works with a Solo 401k

Here’s what changes when you apply the Mega Backdoor Roth strategy to a Solo 401k. 

Normally, your employee contributions go into either a Traditional (pre-tax) account or a Roth account. But to make this strategy work, you’ll need a third option: the after-tax account.

After-tax contributions may not seem appealing at first. Unlike a Roth account which also uses after-tax dollars, an after-tax account doesn’t offer tax-free growth. You don’t get a tax deduction when you contribute, and any gains are taxed when withdrawn. In many ways it’s just like a standard taxable brokerage account. 

So if your investments grow, you’ll owe capital gains taxes on those earnings. Dollars deposited into the account also are after-tax dollars. 

Because of this, after-tax contributions are rarely used on their own. But they serve one critical purpose within a Solo401k: they allow you to use the Mega Backdoor Roth strategy as a  way to contribute additional money into your Roth Solo 401k.

What About Employer Contributions?

To maximize your Roth Solo 401k, first you’ll need to contribute the full employee limit, then use after-tax contributions to fill the rest.

✏️ Hypothetical Example: 

Let’s say you max out your employee contributions at $23,500 into a Roth Solo 401k. Since the total Solo 401k contribution limit for 2025 is $70,000, that leaves $46,500 available for employer contributions.

If you’re a sole proprietor, partner, or have an LLC taxed as a sole proprietorship, employer contributions are based on your net earnings from self-employment. That’s your business profit after subtracting half of your self-employment tax. Because that lowers the base, the actual contribution limit ends up closer to 20% of your net income. To contribute the full $46,500, you’d need to earn about $232,500 in self-employment income after the deduction.

For S corporations or C corporations, employer contributions are based on W-2 wages paid to the owner-employee. You can contribute up to 25% of those wages. So to contribute the full $46,500, the business would need to pay at least $186,000 in W-2 wages — sometimes referred to as net adjusted income.

But with the Mega Backdoor Roth, you don’t need that high of an income. Instead, you can simply contribute the $46,500 as after-tax dollars — and then immediately convert it into a Roth Solo 401k for tax-free growth. 

For full context, you can see IRS publication 560.

How to Make Up the Difference with After-Tax Contributions

To fully maximize your Solo 401k, you first contribute as an employee, then as an employer, and fill the rest with after-tax contributions.

In the earlier example, we saw that you’d need to earn at least $186,000 to reach the $70,000 limit using just employee and employer contributions. But what if your income is lower?

Let’s say your business earns $100,000 in net adjusted income:

✅ You contribute $23,500 as an employee contribution.

✅ Your employer contribution is 25% of net income ($25,000).

That brings your total to $48,500, leaving $21,500 in unused contribution room ($70,000 – $48,500).

With the Mega Backdoor Roth, you could fill that gap with after-tax contributions and then convert the full amount into a Roth Solo 401k to maximize your available contributions.

How Your Funds Are Transferred to a Roth Account

Once you’ve made after-tax contributions, you need to move that money into a Roth account. There are generally two ways to do this:

Both options are tax-free because you’ve already paid taxes on the contributions. The IRS doesn’t require you to pay taxes again when converting to a Roth account.

Which One Should You Choose?

It depends on how you want to use your money. While both a Roth IRA and a Roth Solo 401k offer tax-free growth, the Roth IRA follows slightly different rules.

✅ A Roth IRA doesn’t have required minimum distributions (RMDs). Your money can keep growing indefinitely, while a Roth Solo 401k requires withdrawals starting at age 73.

✅ A Roth IRA allows penalty-free withdrawals of converted funds at any age. Since it’s not an employer-sponsored plan, you can withdraw the amount you convert using the Mega Backdoor Roth strategy anytime without penalty.

❌ A Roth IRA does not allow loans. With a Solo 401k account, you can potentially borrow up to 50% of your plan’s value, up to $50,000 (plan dependent)
❌ A Solo 401k plans generally expect ongoing qualified self-employment income to remain active. If this income stream is likely to change or end, it may make more sense to go with a Roth IRA which has no income requirements to remain open. 

If you want to avoid RMDs and let your money compound beyond age 73 – or if you’d like the flexibility to withdraw funds earlier without penalties – a Roth IRA rollover might be the better choice.

How to Get Started with a Mega Backdoor Roth Strategy

To use the Mega Backdoor Roth strategy, your Solo 401k plan must meet these three requirements:

✅ It must allow after-tax contributions.

✅ It must allow in-service distributions.

✅ You need to make enough income to contribute the maximum.

📝 Important Note: Not all Solo 401k plan providers offer after-tax contributions or in-service distributions, especially free plans. You might need to consider a paid Solo 401k plan provider to access them. 

You can compare Solo 401k plan providers here.

What the Steps Look Like with Most Solo 401k Providers

Most Solo 401k providers follow a similar process:

📝 Important Note: Any earnings in your after-tax account are taxable when converted. To avoid taxes, transfer the funds immediately before they start generating gains.

📌 With Carry Solo 401k, setup is is handled entirely digitally!

The Carry Solo 401k Plan can alleviate the legwork of  the Mega Backdoor Roth conversion process. Learn more about how it works.

How the Mega Backdoor Roth Works in a Solo 401k vs. a Regular 401k

The Mega Backdoor Roth strategy is more common with regular 401k plans offered by employers.

However, a big limitation in a company 401k is that you’re generally bound by whatever options your employer allows. Many company plans don’t offer after-tax contributions or in-service distributions, making the strategy impossible to use.

With a Solo 401k, you’re in control. You can choose a plan provider that offers these features, ensuring you can take full advantage of the strategy (assuming you meet the qualifications).

In addition, both plans offer the same conversion options – you can either roll over the funds into a Roth IRA or do an in-plan conversion into a Roth 401k. However, the Roth Solo 401k with a paid provider can give you more investment freedom while the regular Roth 401k generally limits you to whatever investment options your employer provides.

Why Max Out Your Roth Contributions?

A Roth account doesn’t give you immediate tax savings like a traditional 401k, but it may be beneficial in the long run, especially if you expect to be in a higher tax bracket in retirement. Contributions can potentially grow tax-free, and qualified withdrawals may be tax-free as well. 

However, because you’re contributing after-tax dollars, it can feel more costly now. Whether a Roth 401k makes sense depends on your income, tax bracket, and long-term goals.

✏️ Hypothetical Example: If you invest $50,000 and it grows significantly over time, qualified withdrawals from a Roth account would generally be tax-free. While this illustrates the potential benefit of tax-free growth, remember that not all investments will perform the same — and returns are never guaranteed.

✏️ Hypothetical Real Estate Example: If you use a Solo 401k Roth to buy a $100,000 property investment, and it appreciates to $2 million, you may not owe capital gains tax if the property is held in a Roth account and withdrawn under qualified conditions.

📝 Important Note: It would be prohibited to purchase a residence for yourself or an immediate family member via a Solo 401k. There are strict self-dealing rules, be sure to only use 401k dollars for purely investment purposes.

Disclosure: These examples are hypothetical and for educational purposes only. Past performance does not guarantee future results. All investing involves risk, and improper plan setup may lead to unintended tax consequences.

Roth accounts are generally considered a valuable tool for long-term, tax-advantaged retirement savings. Using the Mega Backdoor Roth strategy with a Solo 401k lets you maximize these benefits and set yourself up for a potentially tax-benefitted retirement.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 technical support with compliance and plan administration. Learn more here.

Invest in Alternative Assets with Your Roth Savings

Roth retirement accounts can be a useful way to invest in alternative assets, offering potential tax benefits if the strategy is executed properly. However, not all providers allow alternative investments, and these strategies involve additional complexity and risk. 

Instead of keeping your funds in a Roth Solo 401k, you can use the Mega Backdoor Roth strategy to move them into a self-directed Roth IRA, like Carry’s Roth IRA. This opens up investment opportunities beyond traditional markets, including real estate, private equity, and select digital assets where allowed. Just remember, investing in alternative assets carries significant risk so be sure to do proper diligence and act accordingly. 

📝 Note: some investment types, like cryptocurrency, may be restricted depending on provider or regulatory guidelines.

With a self-directed Roth IRA, you maintain the same tax-free growth and tax-free withdrawals, but with the added benefit of greater investment flexibility.

📌 Curious about doing a Solo 401k Mega Backdoor Roth conversion? Here’s a step-by-step guide to help you navigate the process on Carry.

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.

All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. Any material provided is for informational purposes only and does not provide personalized investment or tax advice, nor does it account for your specific financial situation or holdings elsewhere. Investments in alternative assets are speculative, generally illiquid and involve a higher degree of risk. Those investors who cannot afford to lose their entire investment should not invest in alternative assets. Before making any financial decisions, consult with qualified legal, tax, or financial advisors to ensure appropriateness for your individual circumstances.

Eligibility, deductibility, and contribution limits for Traditional and Roth IRAs depend on IRS rules, income, and retirement plan participation. Traditional IRA withdrawals are generally taxed as ordinary income, while qualified Roth IRA distributions are tax-free. Early withdrawals may incur penalties. Traditional IRAs have Required Minimum Distributions; Roth IRAs do not. Advanced strategies like backdoor Roth and mega backdoor Roth conversions may be available but have specific rules and potential tax implications. Contribution limits, rules, and available strategies are subject to change. Individuals are responsible for the ongoing compliance of their plans with current IRS regulations. Consult a tax professional for personalized advice on basic and advanced IRA strategies. Carry does not provide tax or legal counsel.

Certain in-app brokerage accounts are offered and maintained by DriveWealth LLC (“DriveWealth”), member FINRA/SIPC. Securities in your DriveWealth brokerage account are protected by the Securities Investor Protection Corporation (SIPC) against custodial loss up to $500,000, including a $250,000 limit for cash.IRA plans are offered by DriveWealth, LLC and opened via the Carry platform. Additional fees may apply to certain services provided by DriveWealth. See DriveWealth Fee Schedule and DriveWealth’s Disclosure Statement for more information.