If you are a married household that makes about $200k, or about $140k for single filers, doing something called a “Mega backdoor roth conversion” is a great way to get more into your Roth savings.

How to qualify for a Mega Backdoor Roth
First, you have to participate in a 401k plan at work. That plan must allow something special called after-tax contributions, which are contributions in excess of the $19,500 annual limit (for 2021).
If your plan allows this, you may be able to do mega backdoor roth conversion, which involves making these after-tax contributions and then converting them to a Roth 401k or Roth IRA while paying no additional taxes.

What to Know About Mega Backdoor Roths
There are a couple caveats though.
First, this is a lot of money. You can contribute up to about $30,000 this year in after-tax contributions. But you need to calculate the amount to ensure you don’t over contribute, and ensure you take the right steps because this is a multi-step process.

Why do Mega Backdoor Roth Conversions?
The reason is to get a lot more money into your Roth savings than you’d otherwise be able to do. Or, this can be a great way for those with income over the IRS limits for Roth contributions to be able to get money into a Roth account.

Consider reaching out to us if you have questions about the strategy, or if you think you might qualify because this can be a great way to increase your savings in the future….(read more)

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For years the Roth IRA has been a popular retirement savings vehicle. Contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. The Roth IRA is especially popular among high earners with income limits preventing many from contributing directly to a Roth IRA. However, there is still a way to access the benefits of a Roth IRA with the Mega Backdoor Roth Conversion.

What is a Mega Backdoor Roth Conversion?

The Mega Backdoor Roth Conversion is a way to contribute substantially more than the traditional contribution limits to a Roth IRA. It requires access to an employer-sponsored retirement plan, such as a 401(k), that allows for after-tax contributions. These after-tax contributions are separate from traditional pre-tax contributions, which are tax-deductible and subject to annual contribution limits.

With this strategy, an employee can contribute up to the plan’s maximum annual contribution limit, which is $58,000 for 2021, including both pre-tax and after-tax contributions. The after-tax contributions can later be converted into a Roth IRA. This conversion doesn’t have any income limits and isn’t subject to the annual Roth IRA contribution limit.

Why is the Mega Backdoor Roth Conversion beneficial?

The Mega Backdoor Roth Conversion can be an especially attractive savings strategy for high earners in a high tax bracket who have already maxed out their traditional pre-tax contributions. By contributing after-tax dollars and converting them to a Roth IRA, they can avoid a tax hit when they withdraw the money later in retirement, regardless of how high their income may be.

This strategy also benefits those who have already maxed out their regular Roth IRA contribution limits but still want to build tax-free retirement savings. It’s a smart way to take advantage of the Roth IRA’s tax-free withdrawals in retirement while still having the flexibility to contribute more.

What are the potential downsides?

One thing to keep in mind is the tax liability of converting the after-tax contributions to a Roth IRA. The contributions themselves are after-tax, so converting them won’t result in a tax bill. However, if there are any gains in the after-tax account, those will be taxed as ordinary income in the year of conversion.

Another potential downside is that not all employer-sponsored retirement plans offer after-tax contributions. Even if they do, some plans may limit the amount you can contribute. It’s essential to check with your HR department and plan administrator to see if your employer’s plan allows for after-tax contributions and whether there are any restrictions.

Ultimately, the Mega Backdoor Roth Conversion can be an excellent strategy for high earners who want to maximize their retirement savings and take advantage of the benefits of a Roth IRA. However, it’s crucial to understand the potential downsides and to consult with a tax professional or financial advisor to ensure that it’s the right strategy for you.