Beyond the backdoor Roth IRA, is the mega backdoor Roth IRA, which allows you to contribute up to $37,500 to your Roth IRA or Roth 401k on top of additional retirement savings. What is A Mega Backdoor Roth Conversion? I know if you did trad -> Roth IRA conversion, that has the 5 year waiting period, but I’m fairly certain the after-tax / Mega Backdoor doesn’t have the waiting period. As long as the money remains in a Roth … It's pretty obvious to see the advantages of these changes for us. And the freedom of an IRA would be nice compared to limited 401k choices. If you are considering a mega-backdoor Roth conversion it is important to view this in the context of your overall financial strategy. You will have to pay Social Security and Medicare taxes, though. The “Mega Backdoor Roth” is a strategy to put as many Roth dollars as possible in your Rocket Dollar Self-Directed Solo 401(k). It should also be noted that you will pay social security taxes (if below the wage base) and Medicare taxes on the after-tax contribution. For a long time, it was an unspoken secret used by retirement planners. A Mega Backdoor Roth takes advantage of the fact that after tax contributions to a 401k plan are treated just like a Traditional IRA in our previous example of the Backdoor Roth. Mega backdoor Roth IRA is an ideal indirect strategy to contribute plenty of thousands of dollars to a Roth IRA every single year, regardless of your earnings. What is vital to know is that the success of the strategy depends heavily on your 401(k) and IRA providers, and so you’ll need to work closely with them to make sure they understand your plan. That was one of the reasons that I went with the Mega Backdoor route rather than a regular brokerage account. The backdoor Roth IRA is a great tool available to high income earners, but it's of great importance to view the conversion in the context of your total financial picture. Mega backdoor roth ira, worth it? If you are 50 or older, have you contributed $26,000? If you choose to contribute to a Roth IRA or to complete a backdoor Roth IRA conversion, you are choosing to be taxed now instead of later. This gives savers greater access to Roth contributions than if they relied strictly on direct Roth 401(k) and IRA contributions. I would say “Yes.” If you’re considering the backdoor Roth, the $6,000 or $12,000 most likely takes the place of a portion of your investments that would otherwise be invested in a taxable account. First saving $53,000 in a year isn’t easy, even if you’re a high-income earner. A mega backdoor Roth IRA allows you to contribute an additional $37,500 (2021) to your retirement account by using certain rules relating to your employer-sponsored 401(k) plan. A mega backdoor Roth conversion is very different than the standard backdoor Roth IRA conversion. In my mind it's only another 6k of tax advantaged funds which is nice but still not that significant when I'm already putting away 45k or so of tax advantaged funds a year (max after tax is limited). With Mega Backdoor Roth strategy, Taylor can contribute significantly more than what she could have saved in a Roth IRA on a yearly basis. It’s like the backdoor Roth, on steroids! Just make sure the plan allows for them and the proper steps are followed. Reply My company allows me the ability to do a mega backdoor roth ira, where I can contribute an additional 26K on top of the 18K limit to an after tax 401k which I can then roll over to a roth ira. The Mega Backdoor Roth IRA is a great retirement strategy. Yes, there a few more steps to go through but it really isn’t that difficult. We don’t call this money non-deductible because you never took it as salary in the first place. How the Mega Backdoor Roth Works. Is leaving the backdoor roth method open really that important with the mega backdoor still available? After some research on the topic, I decided to take advantage. I was excited to see my job support the mega backdoor Roth in their 401k last year and immediately took advantage of it. A Mega Backdoor Roth is a “tax loophole” that allows high-income earners to put more of their paycheck into a Roth account and reap the benefits of tax-free growth. I make ~200K / year including bonuses, etc. The mega backdoor conversion is a different choice. Max out other tax-advantaged accounts first. If your employer only offers a traditional 401k, then you’ll rollover the funds into a Roth IRA. The main benefit of a mega backdoor Roth over a standard backdoor Roth is that you can contribute a much larger amount. It's a few more steps, and there are specific rules about who has access to this. Mega Backdoor Roth 101. We're able to protect a ton more money after-tax, really maximize the value of our retirement accounts, and even lower our payroll taxes (pretty much a free lunch in our case). It’s a complicated process, but the results are well worth it if you can make it work. It is also done with after-tax money. The first question you have to ask: Have I made the maximum salary deferral contribution of $19,500 into my 401k? Are the non-Roth after-tax contributions moved to a separate account? Fast forward to retirement, Taylor now has a pool of money in her Roth monies that she can access tax-free — unlike her traditional 401(k) plan. The process of the Mega Backdoor Roth sounds very simple, but actually being able to do it is difficult. This happens via their employer’s 401k plan if the plan allows after-tax contributions over and above the limit on employee contributions. If you can check all three boxes, let me introduce and explain the Mega Backdoor Roth strategy. Also, since you contributed to the 401(k) with after-tax contributions, you won’t pay income taxes when you convert. If you have not maxed it out, you do not qualify for the Mega Backdoor. There has been a lot of talk lately about the mega backdoor Roth IRA. For 2020, those limits are $19,500 and an additional $6,500 for those over the age of 50. Additional Complexity Using a Mega Backdoor Roth IRA. The mega backdoor Roth is simply the company retirement plan version of the backdoor Roth IRA. The Mega Backdoor Roth Strategy. Well, first, we’d advise that you maximize your basic 401(k) contribution and take advantage of the 50% employer match. Basically, the mega backdoor Roth IRA is just like a backdoor Roth, but since you can use 401(k) funds, the amount is a lot more. Many individuals are aware that in 2019 they can contribute up to $19,000 in their 401(k) as well as an additional $6,000 if they are 50 or older. Your company’s 401k plan must meet two specific criteria to do a Mega Backdoor Roth Allow after tax contributions above and beyond the $19,000 pre tax contribution limits for 2019. Advanced planning strategies, such as the mega backdoor Roth, can have many moving pieces and negative tax implications if done incorrectly. The Mega Backdoor Roth (MBR) shields gains from taxes, but at a cost of liquidity. With a mega backdoor Roth, you may be able to contribute an additional $37,500 toward your retirement this year on top of the regular plan contribution limits. Mega Backdoor Roth Benefits. You can only convert $7,000 to your Roth in 2020 using the backdoor Roth strategy. The big downside, unfortunately, is additional complexity. The Mega Backdoor Roth IRA not only gives an individual the opportunity to use that $37,000 worth of contributions, but it allows the individual the opportunity to put that money into a Roth IRA which is even more attractive for many individuals than a 401(k). Is the Mega Backdoor Roth the Best Option for Your Retirement Savings? Considering that the annual cap for Roth IRAs is currently $6,000 ($7,000 if you’re over 50) in 2021, this is a big deal. Missing out on the tax deduction is a downside. Investing. The mega backdoor Roth allows some investors to contribute as much as $37,500 extra (for 2020) to a Roth IRA. Second, as mentioned before many employers don’t allow it. Step 1) The first thing to do is to reach out to your benefits coordinator or get a copy of your 401(k) plan and see if you can make after-tax (non-Roth) contributions above the $18,000 annual employee contribution maximum. The Mega Backdoor Roth 401k is a 401k so there are no pro-rata issues. Now I'm wondering if it's worth it. With an MBR, contributions are tied up for 5 years (it’s treated as a conversion), and gains until 59.5. With the Mega Backdoor Roth, you're taking your after-tax 401(k) contributions ($19,500, or $26,000 if you're age 50 or over), converting them into a traditional IRA and then converting them into a Roth IRA. Before you read any further, if you are not max funding your traditional 401k ($19,500 if you are under 50 or $25,500 if you are over 50), then do that first. Before even thinking about doing the Mega Backdoor Roth IRA, you should max out all of your other tax-advantaged investment accounts. 1. I think RJ is questioning if the Mega Backdoor Roth is in fact superior to a taxable account for FI (specifically those who can utilize the 0% LTCG tax). The answer is probably not, but it’s worth checking. You can never have too much money when you’re in retirement, and the Mega Backdoor Roth IRA lets you add to more your nest egg. Contribution of $ 6,000 on the tax deduction is a great retirement strategy fracking is, and are! 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