Learn what a mega backdoor Roth-IRA conversion is and how to do it.

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Video Contents

00:00 – Intro
01:48 – What is a Backdoor Roth-IRA Conversion
06:55 – How to Do a Backdoor Roth-IRA Conversion
14:25 – Things to Watch Out For
18:48 – Where to Set up Your Roth-IRA
22:20 – Tax Issues for Backdoor Roth-IRA Conversions

The information in this video is for educational purposes only. Nothing in this video is intended to constitute legal or investment advice. We may receive commissions in exchange for products or services recommended….(read more)

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A Mega Backdoor Roth-IRA Conversion is a tax strategy used by high-earners to contribute up to $37,500 annually to a Roth IRA. However, it can be complicated to execute. So, here’s a step-by-step guide to help you do a Mega Backdoor Roth-IRA Conversion.

1. Confirm Your Eligibility

For this strategy to work, you must be eligible for both the Backdoor Roth IRA and the Mega Backdoor Roth IRA strategies. You must have earned income and a modified adjusted gross income (MAGI) of less than $208,000 if you’re filing jointly and less than $140,000 if you’re filing as an individual.

2. Maximize Your 401(k) Contributions

The Mega Backdoor Roth IRA strategy requires you to make after-tax contributions to your 401(k) account. So, before you proceed, max out your 401(k) contributions. The IRS allows you to contribute $19,500 to your 401(k) account in 2021, with an additional catch-up contribution of $6,500 if you’re 50 or older.

3. Check With Your Plan Administrator

Not all 401(k) plans allow for after-tax contributions. Check with your plan administrator to ensure that your plan allows for after-tax contributions and if there are any other restrictions.

4. Calculate Your After-Tax Contributions

The Mega Backdoor Roth IRA strategy allows you to contribute up to $37,500 annually to your Roth IRA. To get this figure, subtract your 401(k) contributions (up to the maximum annual limit of $19,500 for 2021) from the total amount (for 2021, the total is $58,000), then subtract any employer matching contributions.

5. Make After-Tax Contributions to Your 401(k) Account

Once you’ve determined your after-tax contribution amount, make a lump-sum payment directly to your 401(k) account. Or, you can choose to adjust your contribution rate so that the maximum amount is reached by the end of the year.

6. Request a Rollover

At the end of the year, request a rollover from your after-tax contributions to your Roth IRA. This rollover is usually done through a direct trustee-to-trustee transfer. Alternatively, you could take distributions from your after-tax contributions and roll them over within 60 days to avoid taxes or penalties.

7. Report Your Contribution

When you file your taxes, report the amount of your after-tax contributions on Form 8606. This form reports contributions, conversions, and distributions from IRAs.

In conclusion, the Mega Backdoor Roth IRA Conversion is a tax-efficient way for high-earners to save for their retirement, but it requires careful planning and execution. So, if you’re considering this strategy, make sure you understand it well or consult a financial advisor who can guide you through the process.