Nic explains how a Mega Backdoor Roth works, who most benefits from this strategy, and how it’s a great way to grow your retirement money tax-free.

Host:
Nic Daniels BFA™, Financial Advisor

The Real Money Pros

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The MEGA Backdoor ROTH is a retirement savings strategy that can help you earn more tax-deferred dollars. This is a great tool to use if you are looking to maximize your retirement savings, especially if your income exceeds the contribution limits for a traditional or ROTH IRA. Here’s what you need to know about using the MEGA Backdoor ROTH to grow your nest egg.

First, it’s important to understand the basics of the ROTH IRA. This retirement savings account allows you to make after-tax contributions, and the growth on those contributions is tax-free. When you reach retirement age and begin withdrawing funds from your ROTH IRA, you won’t have to pay taxes on the money you withdraw. This can be a great way to maximize your retirement savings, especially if you anticipate your tax rate being higher in retirement.

The MEGA Backdoor ROTH is a way to contribute even more to your ROTH IRA. If you are under 50 years old, you can contribute up to $6,000 a year to a ROTH IRA (as of 2020). If you are over 50 years old, you can contribute up to $7,000. However, if your income is higher, you may not be able to contribute to a ROTH IRA at all. In 2020, individuals earning over $139,000 ($206,000 for married couples filing jointly) are not eligible to contribute to a ROTH IRA.

Here’s where the MEGA Backdoor ROTH comes in. This strategy allows you to make after-tax contributions to a traditional 401(k) plan, and then convert those contributions to a ROTH IRA. The IRS allows you to contribute up to $57,000 to a 401(k) plan in 2020 (or up to $63,500 if you are over 50 years old). This means that if you max out your 401(k) contributions and your plan allows for after-tax contributions, you can contribute even more to your retirement savings by converting those contributions to a ROTH IRA.

There are some important things to keep in mind if you are using this strategy. First, not all 401(k) plans allow for after-tax contributions, so it’s important to check with your plan administrator to make sure this is an option. Second, there are some tax implications to converting after-tax contributions to a ROTH IRA. You will need to pay taxes on the earnings from these contributions in the year you make the conversion. However, once the money is in your ROTH IRA, it will grow tax-free and you won’t have to pay taxes on any future withdrawals.

In conclusion, the MEGA Backdoor ROTH is a great way to contribute more to your retirement savings and earn more tax-deferred dollars. If you are looking to maximize your retirement savings and your income exceeds the contribution limits for a traditional or ROTH IRA, this strategy may be worth considering. It’s important to work with a financial advisor to determine if this strategy is right for your situation and to make sure you are maximizing your retirement savings in the most effective way possible.