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The Four Rules of Money for Women
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Catherine Magaña is a CFP® or CERTIFIED FINANCIAL PLANNER™ and Managing Partner at Savvy Women Wealth Management in Carlsbad California.

We help women invest wisely and create custom financial plans for their way of living so they can enjoy a fulfilling retirement with peace of mind…
…without giving up their lifestyle.
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Today’s tip will cover “What is a Mega Backdoor Roth IRA?”

If you recall in our last video, a backdoor Roth IRA is a conversion of Traditional IRA assets to a Roth IRA. So, what exactly is a Mega backdoor Roth IRA? It requires that your employer 401k allows after tax contributions. A Mega Backdoor Roth IRA allows you to contribute an additional $37,000 in 2019 into a Roth IRA or Roth 401K, this is on top of your regular contribution limits of $19,000 and if you are in an employer 401k plan that allows after tax contribution up to the current limit of $56,000 in 2019 or $62,000 if age 50 and older. This $56,000 limit consists of your $19,000 contribution (combination of pre-tax and Roth), as well as any matching contributions your employer makes, employer profit-sharing, and after-tax traditional 401(k) contributions made.

Remember, not all 401k plans allow them, so I would make sure and check with your Human resources department or plan administrator. Even if your employer offers after-tax traditional 401(k) contributions, you may not be able to fully maximize the contribution due to plan limits and nondiscrimination testing for highly compensated employees. Also, you will need to check to see if your employer offers in service distributions to a Roth IRA or if you are able to move money from your after-tax portion to a Roth IRA.

There are some moving parts to this strategy, I would suggest your consult with a Certified Financial Planner™ representative to look at your overall financial situation to see if this strategy makes sense for you. For your specific tax related questions consult with your tax advisor.

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LEARN MORE ABOUT: IRA Accounts

CONVERT IRA TO GOLD: Gold IRA Account

CONVERT IRA TO SILVER: Silver IRA Account

REVEALED: Best Gold Backed IRA

The Mega Backdoor Roth IRA is an advanced savings strategy that can help those looking to maximize their retirement savings. The traditional Roth IRA allows you to save up to $6,000 annually with after-tax dollars, but if you earn too much money, you may not be eligible to contribute to a Roth IRA. This is where the Mega Backdoor Roth IRA comes in as it allows you to contribute significantly more than the traditional Roth IRA limit.

What is a Mega Backdoor Roth IRA?

A Mega Backdoor Roth IRA is a tax-efficient savings strategy that allows you to make after-tax contributions to your 401(k) plan and then roll those contributions over into a Roth IRA. It’s called a “Mega” Backdoor Roth IRA because it allows you to contribute more than the usual limit for traditional or Roth IRA contributions.

How does it work?

Typically, a 401(k) plan has contribution limits of $19,500 (for those under 50) for 2021. However, with a Mega Backdoor Roth IRA, you can contribute after-tax contributions beyond these limits.

For 2021, the maximum total contribution limit for a 401(k) plan is $58,000. This includes the employee contribution limit ($19,500) and any matching contributions your employer might make.

If your employer allows it, you can contribute after-tax contributions beyond the employee contribution limit. This additional after-tax contribution is not the same as a Roth 401(k) contribution. After-tax contributions are similar to Roth contributions in that they will grow tax-free, but unlike Roth contributions, you’ll still pay income tax on any gains when you withdraw the money.

Once you’ve made your after-tax contributions, you can then roll these funds into a Roth IRA. The main advantage of doing this is that your money can continue to grow tax-free. Furthermore, any withdrawals in retirement from your Roth IRA will also be tax-free.

Who is eligible for a Mega Backdoor Roth IRA?

Not everyone is eligible for a Mega Backdoor Roth IRA. Firstly, your employer must allow after-tax contributions. Secondly, you must have the funds available to make these contributions. Finally, you must have already maxed out your 401(k) contributions for the year (including employer match), before making any after-tax contributions.

As always, before making any significant financial decisions, it is important to speak with a financial advisor. Some other factors to consider when deciding whether a Mega Backdoor Roth IRA is right for you include your income level, your retirement goals, and your investment strategy.

In conclusion, a Mega Backdoor Roth IRA is a powerful savings strategy that allows you to save significantly more money for retirement than the traditional Roth IRA. However, it is important to ensure you are eligible and have a clear understanding of how it works before contributing. Speak with a financial advisor to discuss the potential benefits and risks of a Mega Backdoor Roth IRA and whether it is a suitable option for your retirement plan.