If your income is above the Roth IRA contribution limit, what creative strategies exist for you to get dollars into a Roth IRA to grow tax-free for your future? The backdoor Roth and mega backdoor Roth contributions are two creative strategies that could be a good fit if they’re right for your situation. We’re covering how these strategies work and when you should consider them on this episode of Wise Money.
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Kevin Korhorn, CFP® offers securities through Silver Oak Securities, Inc., Member FINRA/SIPC. Kevin offers advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. KFG Wealth Management, LLC dba Korhorn Financial Group and Silver Oak Securities, Inc. are not affiliated. Mike Bernard, CFP® and Joshua Gregory, CFP® offer advisory services through KFG Wealth Management, LLC dba Korhorn Financial Group. This information is for general financial education and is not intended to provide specific investment advice or recommendations. All investing and investment strategies involve risk, including the potential loss of principal. Asset allocation & diversification do not ensure a profit or prevent a loss in a declining market. Past performance is not a guarantee of future results.
Intro: (0:00)
Segment 1: (0:11)
Break 1: (10:28)
Segment 2: (12:00)
Break 2: (22:16)
Segment 3: (23:19)
Break 3: (33:34)
Segment 4 (36:40)
Outro: (46:57)…(read more)
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Backdoor Roth and Mega Backdoor Roth Strategies: A Guide to Maximizing Retirement Savings
When it comes to planning for retirement, many people are looking for ways to maximize their savings and take advantage of tax-advantaged accounts. Two strategies that have gained popularity in recent years are the Backdoor Roth and Mega Backdoor Roth strategies. These tactics allow individuals to contribute more money to their Roth IRA or Roth 401(k), ultimately increasing their retirement savings potential.
What is a Backdoor Roth IRA?
A Backdoor Roth IRA involves converting funds from a traditional IRA into a Roth IRA. This strategy is typically used by high-income earners who are not eligible to contribute directly to a Roth IRA due to income limits. By making non-deductible contributions to a traditional IRA and then converting those funds to a Roth IRA, individuals can effectively bypass the income limits and take advantage of the tax benefits offered by a Roth account.
It’s important to note that there are potential tax implications associated with a Backdoor Roth IRA, especially if the individual has other traditional IRAs with pre-tax contributions. Consult with a financial advisor or tax professional to ensure that this strategy is suitable for your financial situation.
What is a Mega Backdoor Roth 401(k)?
A Mega Backdoor Roth 401(k) is a strategy that allows individuals to contribute additional after-tax funds to their employer-sponsored 401(k) plan and then roll those funds over into a Roth IRA. This strategy can be particularly advantageous for individuals who have already maxed out their traditional 401(k) contributions and are looking for a way to save even more for retirement.
To execute a Mega Backdoor Roth 401(k), the individual must have a 401(k) plan that allows for after-tax contributions, as well as the ability to make in-service distributions or rollovers. It’s also important to be mindful of the IRS annual contribution limits for both the traditional 401(k) and Roth IRA accounts.
Why are these strategies beneficial?
Both the Backdoor Roth and Mega Backdoor Roth strategies offer individuals the opportunity to maximize their retirement savings potential by taking advantage of the tax benefits offered by Roth accounts. Roth IRAs and Roth 401(k)s provide tax-free growth and tax-free withdrawals in retirement, making them an attractive option for individuals looking to minimize their tax burden during their golden years.
Additionally, these strategies can be especially advantageous for high-income earners who are looking for ways to supplement their retirement savings beyond the limits of traditional retirement accounts. By utilizing these tactics, individuals can potentially increase their overall retirement savings and enjoy a more financially secure future.
It’s important to note that these strategies may not be suitable for everyone, and there are complex tax rules and implications to consider. Before implementing a Backdoor Roth or Mega Backdoor Roth strategy, it’s crucial to consult with a financial advisor or tax professional to ensure that it aligns with your overall financial plan and goals.
In conclusion, the Backdoor Roth and Mega Backdoor Roth strategies offer individuals the opportunity to maximize their retirement savings potential by taking advantage of the tax benefits offered by Roth accounts. These tactics can be particularly beneficial for high-income earners who are looking to supplement their retirement savings and minimize their tax burden in the long run. However, it’s essential to carefully consider the potential tax implications and consult with a financial professional before implementing these strategies. By doing so, individuals can make informed decisions and take proactive steps toward a more financially secure retirement.
I wish i learnt most of these principles about seven years ago. A lot of people have been trapped strongly in the matrix– Go to school, get a job, and then slave your whole life. Many miss out on life-changing information that could have great effect on their finances. I played with the stock market sometime in 2020, and I was surprised at how well it turned out. I want to put in $90k more into the market. I heard people are making really great returns despite the downturn. Any recommendations?………
True Dat Bruh….
I’ve had to do backdoor Roth for a number of years (spouse as well). I can’t stress from a planning perspective how much easier it is to save the following year’s contributions in a high yield savings and then use that entire amount in January of the contribution year to do the contribution and conversion. Also if you have an age gap between spouses it can make sense for the younger spouse to save into a Roth 401k since it’ll have more time to grow tax free before withdrawing. Even in a high tax bracket scenario the time may be more worthwhile than saving the tax up front. It’s so case by case though.
Thanks for this show. I wish more people had an awareness of this strategy and knew to ask about it.
The AUM managers never tell you this before they tell you to rollover your 401k – most have a minimum portfolio which can’t be met when the bulk of one’s savings are in the 401k!
Here is the truly secret sauce in my employers plan: "Furthermore, you may elect to convert any portion of your After-Tax Contributions Account, or your future After-Tax Contributions, to Roth 401(k) Contributions at any time."
If you have a spectrum conservative fund in your traditional roth and you convert say 20k of spectrum conservative from the traditional ira does the converted amount go into the fund thst is already in the roth or is it a seperate fund in the roth?