How to do a Mega Backdoor Roth Conversion? Does it make sense for me? Dave Zoller, CFP®
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00:00 Mega Backdoor Roth Conversions
00:37 Case Study question
02:13 Actual Numbers
02:43 Did you know?
03:13 A Visual of Backdoor Roths
05:38 Big Questions about this
06:11 The ANTIfragile Retirement
08:16 Mistakes & Misconceptions
10:12 3 Questions to answer
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Should I Do A Mega Backdoor ROTH Conversion in 2024? retirement planning
As the new year begins, many individuals are evaluating their financial goals and considering retirement planning strategies. One lesser-known and often underutilized strategy is the Mega Backdoor ROTH Conversion. This is a complex retirement planning maneuver that involves converting after-tax contributions in a 401(k) or similar employer-sponsored retirement plan into a ROTH IRA, potentially providing significant tax advantages in retirement. So, should you consider doing a Mega Backdoor ROTH Conversion in 2024? Let’s take a closer look at the potential benefits and considerations.
First, it’s essential to understand what a Mega Backdoor ROTH Conversion entails. Most employer-sponsored retirement plans allow employees to make after-tax contributions to their accounts in addition to their pre-tax or Roth contributions. However, unlike Roth contributions, the earnings on after-tax contributions grow tax-deferred rather than tax-free. A Mega Backdoor ROTH Conversion involves taking these after-tax contributions and rolling them over into a ROTH IRA to benefit from tax-free growth potential in retirement.
One of the primary advantages of a Mega Backdoor ROTH Conversion is the potential for tax-free growth. Unlike traditional 401(k) and IRA accounts, which are subject to required minimum distributions (RMDs) starting at age 72, ROTH IRAs do not have RMDs, allowing the account to continue growing tax-free for as long as the account holder wishes. This can be incredibly beneficial for retirees who want to leave a tax-free inheritance for their heirs. Additionally, ROTH IRA withdrawals are tax-free, providing tax diversification and flexibility in retirement.
Another advantage of a Mega Backdoor ROTH Conversion is the ability to maximize retirement savings. For high-income earners who are limited by contribution limits for traditional ROTH IRAs, the Mega Backdoor ROTH Conversion allows them to potentially contribute significantly more money on an after-tax basis and convert it into a ROTH IRA. This can be particularly valuable for individuals who have already maxed out their contributions to traditional retirement accounts and are looking for additional ways to save for retirement tax-efficiently.
However, there are some important considerations to keep in mind before pursuing a Mega Backdoor ROTH Conversion. First, not all employer-sponsored retirement plans allow for after-tax contributions or in-service distributions, which are necessary for executing a Mega Backdoor ROTH Conversion. It’s essential to review your plan documents and consult with a financial advisor to determine if this strategy is available to you. Additionally, the IRS has specific rules and regulations surrounding Mega Backdoor ROTH Conversions, so it’s crucial to ensure that you are following the guidelines to avoid potential tax consequences.
Furthermore, individuals considering a Mega Backdoor ROTH Conversion should be mindful of the potential tax implications. Any pre-tax contributions and earnings rolled over into a ROTH IRA as part of a Mega Backdoor ROTH Conversion will be subject to income taxes in the year of the conversion. Therefore, it’s essential to evaluate your current tax bracket and future retirement income needs to determine if a Mega Backdoor ROTH Conversion makes sense for your financial situation.
In conclusion, a Mega Backdoor ROTH Conversion can be a powerful retirement planning strategy for individuals who have already maximized their contributions to traditional retirement accounts and are looking for additional ways to save for retirement tax-efficiently. However, it’s essential to carefully consider the potential benefits and drawbacks and consult with a financial advisor to determine if this strategy aligns with your financial goals and retirement planning objectives. As with any complex financial maneuver, it’s crucial to weigh the potential benefits against the potential risks and ensure that you are making an informed decision for your long-term financial well-being.
Thank You Dave for your informative videos. I have learned so much in the months since finding your channel. I scheduled a consultation with your firm, that's how much I value your information. You didn't mention if it makes sense to do a Roth Conversion after you are retired and no longer earning a salary. Do the same questions apply in this scenario?
If one's income is too high and no longer eligible for Roth IRA contribution, is this conversion still allowed?
Nice video. Thoughts… 1/ On timing, some plans offer daily in-plan conversions (which ostensibly means bi-weekly dollar cost averaging mirroring pay day). 2/ Those of us who foolishly did 401K -> IRA rollovers (and thus can't do standard backdoor Roth conversions) can still do Mega as the IRA aggregation/prorata rule doesn't apply to after tax 401K -> Mega Backdoor Roth.
Thank you, this is very helpful. Can one also do rollover to roth 401k within former employer plan, where both traditional 401k and Roth 401k accounts are already active?
First of all, thank you so much for this content! My husband and I are both ministers and we both work at the same church. He is 65, I am 61. We have not saved as much for retirement as we would have liked and retirement is fast approaching. We do not have a 403b, but we and the church have been considering setting one up. We have a decent amount of cash on hand to invest since my father passed away and left me some money, and we have been saving my salary to invest and only living off of his the last year and a half. We are in desperate need of doing something to catch up for retirement, but at this stage we can’t afford to do anything risky. To add an extra element to the mix, my husband was advised in his early 20s to opt out of social security, which he did. Thankfully, he has worked enough outside of the ministry to collect Social Security and qualify for Medicare, but his Social Security check will be fairly small because his income going toward that was as well. My Social Security check will be fairly small as well, as I have never had a very high salary, and worked for the church without pay for the first five years we were here, as well as took a major salary, cut for a couple years when the church was struggling. Please Help! Thank you!