The Mega Backdoor Roth allows some Americans to sock $20K, $30K, or more into a Roth account. Most Americans have access to $0 through a Mega Backdoor Roth, but a select few can sock away $20K or more annually through this mechanism.
How is that fair? Considering just how unfair it is, how sustainable is it?
My proposal would get rid of the Mega Backdoor Roth IRA. Instead, all working Americans would have access to a $10K annual Roth IRA contribution limit, with a $2K catch-up contribution starting at age 50. And no more income limits on the ability to contribute to a Roth IRA! Read all about my proposal here:
At 03:57 I reference the 2022 contribution limits ($6K under age 50, $7K age 50 and older). For 2023, those limits have increased to $6,500 under age 50, $7,500 age 50 and older.
Here is the IRS notice that firmly establishes the legality of the Mega Backdoor Roth:
00:00 What is a Mega Backdoor Roth?
02:13 Most Americans Can’t Do a Mega Backdoor Roth
03:06 Arguments Against the Mega Backdoor Roth
03:49 My Proposal
05:27 Conclusion
This video, the show notes, description, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)
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Mega Backdoor Roth IRA is a retirement savings strategy that has gained popularity in recent years. This strategy allows high-income earners to contribute beyond the annual contribution limits set by the IRS into their Roth IRA accounts, potentially boosting their retirement savings.
However, there are certain limitations to the Mega Backdoor Roth IRA strategy that can make it an even more complicated and risky option. Here are some potential problems with this strategy:
1. The risk of exceeding contribution limits
While Mega Backdoor Roth IRA allows for large contributions, there is still a limit to how much one can contribute to their retirement accounts. If individuals contribute more than the annual IRS recognized limit, they would be subject to penalties and fines. It is critical to understand the contribution limits and exercise discretion when implementing this strategy.
2. Unforeseen tax implications
Mega Backdoor Roth IRA involves several complicated tax implications that can cause problems. For example, the traditional IRA contributions that are converted to Roth IRA accounts are subject to tax after conversion. If this tax is not planned for properly, this can be detrimental to the individual’s savings.
3. Lack of liquidity
Mega Backdoor Roth IRA takes a long-term approach, limiting the immediate accessibility of funds. The funds are not available for withdrawal until the age of 59.5 without facing a 10% early withdrawal penalty. This strategy might not be suitable for individuals who require immediate access to their funds.
4. Requirements for employer-sponsored plans
In order to implement a Mega Backdoor Roth IRA strategy, the individual requires to have a 401(k) or equivalent employer-sponsored retirement plan that permits after-tax contributions. However, not all employer-sponsored plans offer such contributions.
5. Overall complexity
The strategy is heavily reliant on the individual’s tax situation, income level, and retirement goals. It also requires careful consideration of contribution limits, conversions, and withdrawals. These complexities may cause confusion or might even disqualify individuals from implementing the strategy at all.
In conclusion, the Mega Backdoor Roth IRA may be a helpful retirement savings tool, but it requires careful consideration and planning. Individuals must be aware of its limitations and potential risks, and carefully assess if this strategy is the right fit for their financial goals. Consultation with a financial advisor may also be needed to maximize the potential benefits of this strategy while minimizing the risks.
By that token you would have to repeal 401(K)s as well, since some small business employers do not offer them to employees, while the rest of us can avail of them.
Your point is well taken but if you strictly want to go by stats the most alarming stat is that most Americans are lousy savers and don't max out any type of account
Stop your whining. It's not fair, it's not fair. Shut up child.
I’ve been working for decades at an employer that doesn’t even offer a 401(k)… that has limited me to IRA only, which is crazy.
The 401(k) and IRA should have a combined limit, no matter which one you contribute to, make it fair for everyone.
Hey Sean, are mega back door roths considered conversions thus penalty free withdrawals prior to 59.5? Im weighing mega back door vs taxable. Gains harvesting is enticing plus no capital gains tax with artificially low income. Maybe you could do a video on comparing these two options? Thanks!
Fair? I don't think Congress even knows what that means. How about we cap the total amount you can contribute pre and/or post tax to all retirement accounts combined? All other limits removed. Then everyone still has $60k tax advantaged a year they can contribute to whatever kind of account they like. It's still not "fair", because most Americans don't make enough to save $60k/yr, but it's better than the current debacle.
If fair is the standard we are going to use to evaluate the tax code, this is just the tip of the iceberg. Not to mention the definition of fair.
But I think you are missing the forest. The whole concept of the 401k is unfair. Small businesses have trouble setting up, maintaining and funding these accounts. Some employers offer them, some don't. That is the same phenomenon as some employers offering mega back doors. Also, because the ~ 65k limit applies to employer contributions, even without the MBD, a high earner has the ability to take more advantage by virtue of X% of their salary being higher.
The solution should be dissolution of retirement accounts and a flat tax consumption tax if you want to be fair. At least get rid of the 401k and make IRAs MUCH larger with a regime for employer contributions. But none of that will happen.
But I have access to an MBD, so maybe I'm biased.