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As an AI language model, I am happy to help explain the complex financial term “Mega Backdoor Roth IRA” in simpler English for all of you.
First off, let’s start with what a Backdoor Roth IRA is in general. A Roth IRA is a special retirement account that allows you to contribute money to your retirement account after you’ve paid taxes on that money. With a Traditional IRA, you can deduct your contribution from your income today, but you will have to pay taxes on the withdrawals in retirement. With a Roth IRA, you pay taxes on the contributions up front, but then there are no taxes on the withdrawals down the road.
Now, for a Backdoor Roth IRA, it’s when you contribute to a non-deductible Traditional IRA and then convert that to a Roth IRA. It’s a way around the income limits that prevent direct contributions to Roth IRAs. Essentially, you’re contributing after-tax money to the Traditional IRA and then converting it to a Roth IRA, so you’re paying taxes on the converted amount, but then it grows tax-free down the road.
So, what is a Mega Backdoor Roth IRA? It’s an advanced strategy that allows high-earning individuals (those earning over $140,000 if single or $208,000 if married filing jointly) to contribute even more money into Roth accounts. One of the limitations for most workers is that you can only contribute $6,000 per year to your Roth IRA (or $7,000 if you’re 50 or older). That’s not a lot of money to save for your retirement, especially if you are a high-earner.
This is where the Mega Backdoor Roth IRA comes in. With this strategy, instead of contributing to a Traditional IRA, you can contribute to an after-tax 401(k) or similar employer retirement plan. The employer must allow after-tax contributions, which is not the case for all retirement plans. Then, with the Mega Backdoor Roth IRA, you’re allowed to convert those after-tax contributions to a Roth IRA.
This option allows high earners to contribute an additional $37,000 in after-tax retirement contributions for 2021 (or a total of $58,000, including the pre-tax limit). This is an incredible opportunity to set up a sizeable tax-free retirement nest egg that will grow over time.
However, it’s important to note that the Mega Backdoor Roth IRA strategy comes with a few downsides. Firstly, not all employers allow these types of after-tax contributions. Secondly, it could impact your current take-home pay as you’ll be contributing more into your retirement account on an after-tax basis. And finally, you’ll have to pay taxes on any investment earnings when you convert, so if you have high investment gains, you’ll have to pay more taxes.
In summary, the Mega Backdoor Roth IRA is a useful strategy for those who want to contribute more to their Roth accounts but who are high earners. It’s important to understand the rules and limitations and to speak with a financial advisor to determine if your employer’s 401(k) plan allows for after-tax contributions and what the ramifications may be for your overall financial plan.
Thanks for watching everyone! If you found this video interesting, then be sure to give it a LIKE! Also check out my video on the regular Backdoor Roth IRA if you have not seen it yet: https://youtu.be/7agjhld2CYA
What if I made the mistake of letting my after-tax contributions accumulate without doing yearly moves? Can I still do this if my total $50K in contributions has grown to $100K? Can I split it between Roth and Traditional?
Man, I wish you still did these kind of videos.
At 10:50, you’ve included Roth IRA but mentioned that this video high income earners. Due to income limits, I no longer have a Roth IRA.
Is there a way for high income earners to contribute to everything on your list including Roth IRA? Or maybe I would have to back door my traditional IRA into Roth IRA first?
@Jake Broe: how do you add more beyond the 19,500? I thought the excess capacity was employer contribution exclusive?
Wait a seconds…? I thought that it was best to put my TSP/401K account into a Roth TSP account? Now based off of what you are stating here are you saying that its better to have a traditional TSP & a ROTH IRA? WHAT?
Do you know if the Mega Backdoor Roth is subject to the Pro-Rata Rule as well?
Jake, can you explain how a "self directed Roth IRA" works and using an LLC to purchases investments with it? Thank you!
Can’t contribute to a Roth IRA if your income is over 208 married
What about 403B plan. What is maximum contribution per year
So confused…such a complicated system
Jake, how does this work if your income is above the ROTH IRA limit. If my spouse and I earn over $208k how are we able to contribute to a ROTH IRA?
I’ve also heard that some people have the option to have non-Roth after tax contributions be automatically be rolled over into the Roth 401k bucket, literally the same as Roth contribution
When did the law change to allow this? This is awesome…
Great Video…can you give more insight on doing a Roth IRA conversion from a SEP IRA and regular IRA. Are there any strategies to benefit those of us with those types of accounts.
What you can also do is max out your Roth TSP, and do a direct rollover to your Roth IRA.
can a small business owner with 0 employees still do it? I'm guessing no & that group is relegated to the SEP IRA?
Vanguard 401ks can indeed allow contributions using post-tax dollars. You can subsequently funnel this money to either a Roth option on your 401k (which could have limited investment options, but might have slightly lower fees if you have access to institutional shares), or your Roth IRA (where you can invest in anything via adding a brokerage option to the account, and can improve your expense ratios by graduating to admiral shares). Do this ~immediately, O(days), before taxable interest is generated by the post-tax dollars from the initial contribution to the 401k.
And yes, you can absolutely use TurboTax with this setup.
So I can take a distribution from my TSP if I'm over 59 1/2 and move it into a mega backdoor Roth IRA? I'm guessing I'd have to pay taxes on it now? It was hard enough for me to figure out how to put the backdoor IRA in TurboTax not sure I could figure out the mega one.
Jake, can I convert my after tax contributions in traditional 401 to Roth 401k?
Yes, my company allows in service distribution.
Love the audio and content! Great job!
Great video! Sadly, my company doesn't offer this, was so disappointed. They offer a Roth 401k, so the rep felt that was a good value. Yup, but the ability to contribute more is always better.
Sounds sexual
Jake, I'd love it if you could do a response to this video by Credit Shifu! https://youtu.be/lssU_PsRQ1o no matter how much I try to explain it to him, he doesn't understand the concept of using a no-fee cashback setup as the opportunity cost!
After Tax 401k contributions don't get taxed a second time, only gains get taxed at ordinary income.
Excellent video, Jake! Very informative and useful. Thanks for the clear explanations.
As a CPA I don't recommend it. I prefer the max out traditional 401k and then do backdoor roth IRA conversions each year. Now your left with 2 accounts that you can use when retired to manage your taxable income.
Seriously wish we can have an HSA for people in the military.
$135,100 total a couple over 50
Does TSP allow this?
Another great video Jake. I would hire you once you get your CPA and consider this mega backdoor approach. 🙂