A mega backdoor Roth presents a wonderful opportunity to potentially save over $40,000 more into a Roth every year, even if you make too much money for a Roth IRA. We’ll cover how a mega backdoor Roth works, as well as how you can take advantage of it.

Every year the IRS tries to incentivize us through tax breaks on retirement accounts. Unfortunately, these contributions are capped for the 401(k). For 2022, you can contribute $20,500 ($27,000 age 50 and older) . And for an IRA, it’s $6,000 ($7,000 age 50 and older). And additionally, if you make too much money for a Roth IRA, you might not be able to contribute. You might be a little confused if you look up the max 401(k) contribution because you might see a number that’s a heck of a lot larger than $20,500, and that number is $61,000 ($67,500 age 50 and older).

So, what’s going on here? Well, if we include the employer side of the 401(k) contribution, we’re capped at $20,500, but the employer can make up the rest of that difference up to $61,000. They probably won’t though. So that is where the backdoor Roth IRA opportunity lies for employees as they can make up the difference.

There’s one primary reason why someone would do this. And that’s tax savings with Roth monies, tax-free growth, tax-free distribution, and with this mega back door Roth, a chance to put more money into that Roth bucket. One other thing to keep in mind here: recent legislation was proposed to take away the backdoor Roth. If that happens, you might not be able to take advantage of this anymore, which means you may want to take advantage of it now.

This is a complex decision, and if you feel like you benefit from having a guide help you with this decision, you can use our scheduling tool to schedule a complimentary consultation with one of our advisors here at Mariner Wealth Advisors.

Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax-free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59 1/2 are subject to an early withdrawal penalty.

#Roth #MegaBackdoorRoth #401k
 
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The Mega Backdoor Roth is a retirement savings strategy that allows high earners to contribute additional funds beyond the annual limits set by the IRS for traditional Roth contributions. This strategy is used by individuals who have already maximized their 401(k) and traditional Roth IRA accounts.

What is a Mega Backdoor Roth?

The Mega Backdoor Roth strategy involves making after-tax contributions to your 401(k) plan and then rolling over these contributions into a Roth IRA account. This allows for additional tax-free growth on contributions that have already been taxed.

How does it work?

The Mega Backdoor Roth strategy involves several steps:

1. Determine whether your employer’s 401(k) plan allows for after-tax contributions. Not all plans offer this option, so double-check before proceeding.

2. Make after-tax contributions to your 401(k) plan beyond the annual contribution limit. The limit for 2021 is $19,500, but the total contribution limit, including employer contributions, is $58,000.

3. Request a rollover of your after-tax contributions into a Roth IRA account either annually or at the end of your employment with your employer.

4. Enjoy tax-free growth on your Mega Backdoor Roth contributions in your Roth IRA account.

Benefits and limitations

The Mega Backdoor Roth strategy can provide significant benefits, such as additional tax-free growth on retirement savings and increased flexibility in retirement income planning. However, it also has some limitations.

First, not all 401(k) plans offer the after-tax contribution option. Second, there may be fees associated with rollovers, and not all employers or 401(k) plans allow for rollovers. Third, it may be difficult to access your after-tax contributions should you need them before retirement.

Conclusion

The Mega Backdoor Roth strategy can be a powerful retirement savings tool for high earners. However, it is important to consult a financial advisor or tax professional before implementing the strategy to ensure it is right for your individual financial situation. As with any investment strategy, it is important to carefully consider the costs, benefits, and risks before proceeding.