SECURE 2.0 has given us the new employer Roth 401(k) contribution. It’s important to understand tht that the Mega Backdoor Roth is NOT the same as employer Roth 401(k) contributions.

Having employer contributions go into a Roth 401(k) sacrifices a tax deduction/exclusion which is valuable today. The Mega Backdoor Roth does not sacrifice a tax deduction today.

This video, the show notes, description, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)

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When it comes to retirement savings, there are a number of different options available to individuals. Two of the most popular approaches are Mega Backdoor Roth and Employer Roth 401(k) contributions. While both of these strategies can be beneficial, there are some key differences between them that individuals should be aware of before making a decision.

Mega Backdoor Roth contributions allow individuals to save significantly more money each year than traditional 401(k) plans. This involves contributing after-tax dollars to an account that is separate from a standard Roth IRA. The key advantage of this approach is that it allows individuals to save a larger percentage of their income each year while still enjoying the tax benefits of a Roth IRA.

Employer Roth 401(k) contributions, on the other hand, are similar to traditional 401(k) plans but with Roth tax treatment. Essentially, an individual is contributing pre-tax dollars to their retirement account, but they are doing it through a Roth 401(k) plan. This approach allows individuals to take advantage of tax-free withdrawals during retirement, but the contribution limits are typically much lower than those for Mega Backdoor Roth contributions.

So, which approach is better? It really depends on an individual’s unique financial situation and retirement goals. For young professionals who are just starting out in their careers and expect to be in a higher tax bracket later in life, Mega Backdoor Roth contributions are often the better option. This allows them to save a larger percentage of their income while keeping their taxes relatively low.

For older adults who are already in a high tax bracket and expect to retire in a lower bracket, Employer Roth 401(k) contributions may be the smarter move. While the contribution limits may be lower, the tax benefits during retirement can be highly valuable.

Ultimately, the decision between Mega Backdoor Roth and Employer Roth 401(k) contributions will depend on an individual’s personal circumstances, preferences, and financial goals. It’s important to consult with a financial advisor before making any major decisions about retirement savings to ensure that you are making the best possible choices for your long-term financial health.