What’s the mega backdoor Roth conversion? if you’re looking to convert more assets to a Roth account than the usual yearly amount, this is the way it can be done!
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You may have heard of the popular backdoor Roth IRA, a strategy used by high-income earners to contribute to a Roth IRA despite their income exceeding the limits set by the IRS. But have you heard of the MEGA backdoor Roth account? This lesser-known strategy takes the backdoor Roth to the next level, allowing individuals to contribute even more money to a Roth IRA each year.

The MEGA backdoor Roth involves leveraging employer-sponsored retirement plans, such as a 401(k) or 403(b), that offer after-tax contributions. Unlike pre-tax contributions, which are subject to income limits, after-tax contributions are not limited by income. This presents an opportunity for high-income earners to contribute more to their retirement savings in a tax-efficient way.

Here’s how the MEGA backdoor Roth works: First, an individual maximizes their contributions to their employer-sponsored retirement plan, up to the annual limit set by the IRS. Then, they make additional after-tax contributions to the plan, up to the overall limit, which is currently $58,000 for those under 50 and $64,500 for those 50 and over in 2021. These after-tax contributions can be converted to a Roth IRA either periodically or as a lump sum, depending on the plan’s rules.

By converting the after-tax contributions to a Roth IRA, individuals can potentially enjoy tax-free growth and withdrawals in retirement. This can be a significant advantage, especially for high-income earners who may be in a lower tax bracket now than they expect to be in retirement.

It’s important to note that not all employer-sponsored retirement plans allow for after-tax contributions or in-service withdrawals, which are necessary for executing the MEGA backdoor Roth strategy. Additionally, there are complex tax implications to consider when converting after-tax contributions to a Roth IRA, so it’s recommended to consult with a financial advisor or tax professional before implementing this strategy.

While the MEGA backdoor Roth may not be suitable for everyone, it can be a powerful tool for high-income earners looking to maximize their retirement savings and take advantage of the benefits of a Roth IRA. By strategically utilizing after-tax contributions in their employer-sponsored plan, individuals can potentially supercharge their retirement savings and achieve greater tax efficiency in the long run.