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REVEALED: Best Gold Backed IRA

A Mega Back Door Roth IRA is a retirement savings strategy that allows individuals to contribute a significant amount of money to a Roth IRA account, even if they already maxed out their traditional 401(k) or IRA contribution limits. The name “Mega Back Door” refers to the fact that this strategy allows individuals to contribute much more than the usual backdoor Roth IRA contribution limit.

To understand this strategy, it’s important to know how Roth IRAs work. Roth IRAs are a type of individual retirement account that allows contributions to grow tax-free, and withdrawals are also tax-free in retirement. However, there are strict income limits for contributing to a Roth IRA directly. In 2021, individuals who earn more than $140,000 and married couples who earn more than $208,000 are not eligible to contribute directly to a Roth IRA.

This is where the backdoor Roth IRA strategy comes in. Individuals who are not eligible to contribute directly to a Roth IRA can still do so by making a non-deductible contribution to a traditional IRA and then converting that contribution to a Roth IRA. However, there is a limit to how much can be contributed to a backdoor Roth IRA each year – $6,000 per year for those under 50 and $7,000 for those 50 and older.

The Mega Back Door Roth IRA strategy takes this a step further. It allows individuals to contribute after-tax dollars to a traditional 401(k) or similar employer-sponsored retirement plan, and then convert those funds to a Roth IRA. This can be particularly useful for high-earning individuals who have already maxed out their pre-tax 401(k) contribution limit but still want to contribute more to their retirement savings.

The key to the Mega Back Door Roth IRA strategy is the after-tax contribution. Unlike a pre-tax contribution, which reduces taxable income in the year it is made, an after-tax contribution is made with dollars that have already been taxed. This means that when the funds are converted to a Roth IRA, they will not be subject to additional taxes.

There are some limitations to the Mega Back Door Roth IRA strategy, however. First, not all employer-sponsored retirement plans allow for after-tax contributions, so individuals should check with their plan administrator to see if this is an option. Additionally, the contribution limits for after-tax contributions are separate from the regular 401(k) contribution limit, and vary by plan. In 2021, the maximum after-tax contribution is $38,500 for those under 50 and $43,000 for those 50 and older. Finally, there are some potential pitfalls to be aware of, such as the pro-rata rule, which can complicate the tax treatment of converted funds if an individual has both pre-tax and after-tax funds in their traditional IRA.

Overall, the Mega Back Door Roth IRA is a powerful retirement savings strategy for high-earning individuals who have already maxed out their traditional pre-tax retirement contributions. By contributing after-tax dollars to a traditional 401(k) and then converting those funds to a Roth IRA, individuals can enjoy years of tax-free growth and withdrawals in retirement. However, it is important to understand the limitations and potential pitfalls before implementing this strategy.