How the Mega Backdoor Roth 401(k) Eliminates Tax Drag on Retirement Savings

The “Maxed Out” Myth

Alex thought he was doing everything right.

Each year, like clockwork, he contributed the IRS max to his 401(k). He got the full match. He kept his portfolio diversified. He even rebalanced quarterly (almost no one gets around to doing this).

And yet, a quiet voice in the back of his mind kept asking:

“Is this really enough to retire on?”

It’s a familiar feeling for a lot of high earners. You’re disciplined and consistent, but once you hit that $23,500 contribution limit (2025), it feels like the door slams shut.

The truth is, for people people in tech (like Alex), that door isn’t locked. There’s a back entrance.

It’s called the Mega Backdoor Roth 401(k).

And if your company’s 401(k) plan allows it, this strategy could dramatically increase your tax-free retirement savings without needing to earn a penny more or work a day longer.

The Real Threat Isn’t Market Volatility. It’s Tax Drag.

Most people think taxes only hurt at filing time.

They’re wrong.

The bigger pain point is what happens quietly, year after year, inside a taxable brokerage account.

Every dividend, capital gain, and interest payment chips away at your return.

That small bite is what we call “tax drag.” And for many investors, a conservative estimate is that it’s around 0.5% of lost return per year.

Sounds tiny, but here’s how tiny turns into terrifying:

That’s not a typo. A 0.5% annual tax drag can erase almost $4 million over a long compounding period.

In today’s dollars, that’s like giving up nearly $900,000.

And typical financial planning says you should let your Roth account compound for as long as possible. So not tapping your Roth until you’re in your 70s might not be that far-fetched.

Let’s break down how to leverage the Mega Backdoor Roth to stop the leak.

The Three-Part Fix

1. After-Tax Contributions

Most people think the 401(k) limit is $23,500. And while that is technically true for employee deferrals, the real limit is $70,000 (2025, including employer match). If your plan allows after-tax contributions (i.e., money that you might otherwise throw into your taxable brokerage account), you can fill up to the $70,000 gap, even after you’ve maxed out your regular 401(k).

2. The Conversion

Once that after-tax money is in the plan, you move it to Roth. This happens one of two ways:

• In-plan Roth conversion

• In-service withdrawal to a Roth IRA

Both stop the tax drag before it starts.

3. Tax-Free Growth

Now that the money’s in Roth, it compounds untouched. All the annual tax friction is removed.

Your Next Steps

1. Call HR or Your Plan Administrator

   Ask two specific questions:

• Does our 401(k) plan allow after-tax contributions beyond the $23,500 limit?

• Can I move those after-tax funds into a Roth, either in-plan or via in-service withdrawal?

2. Do the Math on Your Contribution Room
   Take the total IRS limit for the year ($70,000 if under 50, $77,500 if over). Subtract your employee 401(k) deferral and your employer’s match. That’s your after-tax contribution opportunity.

3. Set Up Payroll Automation
   Max your regular 401(k) first to get the full match (be aware of when your match actually happens so you don’t forget to leave room for it!). Then direct additional savings to the after-tax bucket.

4. Build a Conversion Habit
   Once money hits after-tax, convert it fast (some plans allow this to happen automatically). The longer it sits unconverted, the more you risk some taxable growth.

5. Verify Tax Forms Are Correct
   You should get Form 1099-R each year-end showing a tax-free rollover. Check that your tax return shows $0 taxable.

Here’s an easy-to-follow outline that you can save:

Meme of the Week

Go Farther Than “Maxed Out”

Most people stop when the IRS says “you’ve contributed enough.”

But that’s just the beginning for those who know how the system really works.

The Mega Backdoor Roth isn’t for everyone. But for those with access, it’s one of the cleanest ways to build long-term, tax-free wealth in large amounts.

And it’s one of the few strategies where saving more and paying less tax go hand-in-hand.

If your plan allows it, but you’re not confident in execution, this is where an advisor earns their keep. Especially if you want to coordinate tax strategy with broader planning.

Schedule your complimentary ‘Are You On Track’ analysis today to find out how a Mega Backdoor Roth can fast track your work optional timeline:

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Marcel Miu, CFA and CFP is the Founder and Lead Wealth Planner at Simplify Wealth Planning. Simplify Wealth Planning is dedicated to helping tech professionals master their money and achieve their financial goals.

Disclosures
Simplify Wealth Planning, LLC (“SWP”) is a registered investment adviser in Texas and in other jurisdictions where exempt; registration does not imply a certain level of skill or training.

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