What is a Mega Backdoor Roth IRA?
A Mega Backdoor Roth IRA is an advanced retirement savings strategy that allows individuals to contribute significantly more to their Roth accounts than the standard limits. This method is especially beneficial for high-income earners who are typically ineligible to contribute to a Roth IRA due to income restrictions.
How Does It Work?
The strategy involves two main steps:
After-Tax Contributions: Make after-tax contributions to your 401(k) or other workplace retirement plan.
Conversion to Roth: Convert these after-tax contributions to a Roth IRA or Roth 401(k).
Not all retirement plans allow these steps, so check your specific plan’s features.
Why start with after-tax contributions? Because they allow you to save beyond the annual contribution limit for pre-tax and Roth contributions.
Simply, one can contribute $7000 (under 50) $8000 (over 50 catch up) into a non-deductible IRA and convert that amount into a Roth IRA. If you are under 50 years old, there is a 10% penalty on top of required taxes. Over 50 no penalty but there is still a tax consequence in the conversion. Each year you contribute to the IRA and convert to the Roth IRA.
In a well designed 401(k), the MEGA Backdoor Roth (in-plan Roth conversion) is powerful strategy to create a meaningful tax-free retirement bucket. For 50 and under, the maximum contribution in 2024 to a 401(k) is $23,000 pre-tax. In addition, you can add a $46,000 post-tax non-deductible contribution, bringing your total 401(k) contribution to $69,000 of which you convert $46,000 to the Roth (401k). Over 50, those numbers are $30,500 (with catch up contribution) and $46,000 post-tax non deductible contribution that is converted into the Roth 401(k). Repeat each year.
Who Can Benefit?
This strategy is particularly advantageous for those who:
Earn above the direct Roth IRA contribution limits ($161,000 for single taxpayers or $240,000 for married-filing-jointly in 2024).
High-income earners who can’t directly contribute to a Roth IRA but have a 401(k) plan at work that allows after-tax contributions and in-service withdrawals or conversions.
Considerations and Tax Implications
Before implementing the Mega Backdoor Roth strategy, it’s crucial to understand the potential tax implications and ensure it aligns with your financial goals. Consulting with your Avantia Lead Advisor is recommended to navigate the complexities involved.
Conclusion
The Mega Backdoor Roth IRA can be a powerful tool for maximizing your retirement savings. By leveraging after-tax contributions and strategic conversions, you can potentially secure a more prosperous retirement.
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