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Learn how high-income earners like Tom and Kim Truman can leverage the Mega Backdoor Roth IRA strategy to maximize tax-free savings for retirement. Brad Lineberger, a certified financial planner and founder of Seaside Wealth Management, breaks down this advanced financial strategy, offering insights into how it works and its potential benefits for you and your family.
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Tax Saving Strategy For High Earners Using Mega Backdoor Roth IRA Strategy
For high earners, finding ways to save on taxes can be a challenging task. However, utilizing the Mega Backdoor Roth IRA strategy can be a valuable tool in maximizing tax savings while also building a substantial retirement fund.
What is a Mega Backdoor Roth IRA?
A Mega Backdoor Roth IRA is a strategy that allows high-income earners to make after-tax contributions to a Roth IRA by taking advantage of employer-sponsored retirement plans, such as a 401(k) or 403(b). This strategy enables individuals to contribute significantly more money to their Roth IRA than they would be able to with traditional contribution limits.
How does it work?
Typically, individuals can contribute up to $19,500 (2021 limit) to their 401(k) on a pre-tax basis. However, with the Mega Backdoor Roth IRA strategy, individuals can make after-tax contributions to their retirement plan above and beyond the pre-tax limit. These after-tax contributions can then be converted to a Roth IRA, where they can grow tax-free and be withdrawn tax-free in retirement.
For example, let’s say an individual has already maxed out their pre-tax contributions to their 401(k) at $19,500. They can then make after-tax contributions to their retirement plan, up to a total limit of $58,000 (2021 limit). Once these after-tax contributions have been made, the individual can then convert these funds to a Roth IRA, where they will continue to grow tax-free.
Benefits of the Mega Backdoor Roth IRA strategy
There are several benefits to utilizing the Mega Backdoor Roth IRA strategy for high earners. First and foremost, it allows individuals to contribute significantly more money to their Roth IRA, which can potentially result in a larger retirement fund. Additionally, funds in a Roth IRA grow tax-free and can be withdrawn tax-free in retirement, providing a valuable tax-saving strategy.
Furthermore, by making after-tax contributions to a Roth IRA, individuals can diversify their tax treatment in retirement. This can be especially beneficial for high earners who may be subject to higher tax rates in retirement.
Considerations to keep in mind
While the Mega Backdoor Roth IRA strategy can be a valuable tool for high earners, there are some considerations to keep in mind. For example, not all employer-sponsored retirement plans allow for after-tax contributions, so individuals may need to check with their plan administrator to see if this strategy is available to them.
Additionally, the IRS has specific rules and limits regarding the conversion of after-tax contributions to a Roth IRA, so individuals should consult with a financial advisor or tax professional to ensure they are following proper guidelines.
In conclusion, the Mega Backdoor Roth IRA strategy can be a valuable tax-saving tool for high earners looking to maximize their retirement savings. By taking advantage of after-tax contributions to a Roth IRA, individuals can potentially build a larger retirement fund while also benefiting from tax-free growth and withdrawals in retirement. It is important for individuals to carefully consider their options and consult with a financial advisor to determine if this strategy is right for them.
If you want to find out if your plan is eligible, use the following template and
send it to your HR department:
– Does our 401(k) allow for after-tax contributions beyond the standard limits?
– If so, is there an option to roll these contributions into a Roth IRA while still
employed here? Are there any company-specific guidelines or procedures I
should be aware of?
– I'm in discussions with my financial advisor about this, but wanted to get clarity
on our company's stance first. Thank you for your time and assistance.
If you are eligible for this Mega Backdoor Roth strategy, reach out to us at team@seasidewealth.com or call (760) 730-8120
In addition to this higher earner can do after tax contributions to Traditional IRA ( Selff and spouse ) . Track it through 8606. Rollover at the time of retirement. It is another way to further ramp up bucket of money for rollover to Roth. This adds up to total 88K for 2024. 72K 401k (Pre-tax+after tax), 16K to traditional Roth. 36K goes to Roth right away with back door. Rest at retirement. You are spot on to have saving to use for paying taxes and expenses while you roll over into ROTH.