Tommy Blackburn, CFP®, CPA, PFS, of Mason & Associates discusses the Voluntary Contribution Plan and the opportunity to contribute a lifetime of earnings into a Roth IRA.

ℹ️ About the Episode:
• A massive tax planning opportunity
• One of the best kept tax secrets
• Must be CSRS or CSRS Offset and actively employed
• Ability to contribute 10% of your cumulative lifetime earnings
• This contribution must be made on an after-tax basis
• Contributions can then be rolled over into a Roth IRA

🎙️Special Episode: VCP Mega Mega Back Door Roth IRA
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🎙️New Client Process and Experience
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The Mega Mega Back Door Roth IRA (The Voluntary Contribution Plan)

Saving for retirement is crucial, and finding the right investment vehicle can make a significant difference in the long run. For individuals looking to maximize their retirement savings, the Mega Mega Back Door Roth IRA, also known as the Voluntary Contribution Plan, is gaining popularity.

The Mega Mega Back Door Roth IRA is an advanced strategy that allows individuals to contribute far beyond the traditional contribution limits of regular retirement accounts. It was initially designed for high-income earners who were previously unable to take full advantage of Roth IRAs.

To understand how this strategy works, let’s first take a step back and review the basics of the Roth IRA. A Roth IRA is a retirement account where contributions are made with after-tax dollars. The unique advantage of a Roth IRA is that qualified withdrawals in retirement are tax-free, including the growth of the investments over time.

Traditionally, individuals have been limited to contributing a maximum of $6,000 (in 2021) per year into a Roth IRA if they are under the age of 50, or $7,000 if they are 50 or older. However, individuals with higher incomes have faced restrictions on contributing directly to a Roth IRA or have been limited by lower contribution limits due to their income level.

This is where the Mega Mega Back Door Roth IRA strategy comes in. It is essentially a way to circumvent these existing limitations and significantly increase retirement savings.

To execute this strategy, certain prerequisites need to be met. First and foremost, an individual must be eligible for an employer-sponsored retirement plan, such as a 401(k) or 403(b). The plan must also allow for after-tax contributions, which are not the same as Roth contributions. These after-tax contributions are made with dollars that have already been taxed, similar to a Roth IRA.

Once an individual has maxed out their regular 401(k) contributions, they can make additional after-tax contributions to the same plan. The current contribution limit for all 401(k) contributions (employee and employer contributions, but excluding catch-up contributions) is $58,000 (in 2021). This means that after-tax contributions can be made up to this limit, provided they do not exceed the annual contribution limit set by the IRS.

Here comes the crucial step of the strategy. Once after-tax contributions have been made, an individual can then convert those contributions to a Roth IRA through an in-plan conversion. This is known as an in-service distribution. By converting after-tax contributions to a Roth IRA, individuals can take advantage of tax-free growth and qualified tax-free withdrawals in retirement. In this process, it is crucial to avoid taxable events by ensuring there are no earnings or gains made on the after-tax contributions before the conversion.

The Mega Mega Back Door Roth IRA strategy provides a unique opportunity for individuals who have maxed out other retirement accounts to increase their tax-advantaged savings. However, it’s vital to consult with a financial advisor or tax professional before implementing this strategy, as it can be complex and requires a careful understanding of the tax implications and plan rules.

In conclusion, the Mega Mega Back Door Roth IRA, or the Voluntary Contribution Plan, offers high-income earners and motivated savers an alternative way to save for retirement beyond the traditional contribution limits. With careful execution and professional advice, it can be an effective strategy to maximize retirement savings and take advantage of the tax benefits offered by a Roth IRA.