A mega backdoor Roth IRA is a strategy that allows individuals to contribute additional after-tax funds to their 401(k) plan beyond the regular annual contribution limits, and then convert those after-tax funds to a Roth IRA.
The “mega” refers to the fact that the contribution limits for after-tax contributions are much higher than those for regular contributions, allowing individuals to save a significant amount of money in a tax-advantaged account.
This strategy can be particularly beneficial for high-income earners who may not be able to contribute to a Roth IRA directly due to income limitations. By using the mega backdoor Roth IRA strategy, they can still take advantage of the tax-free growth and withdrawals that a Roth IRA offers.
Step 1: Check if your employer’s 401(k) plan allows after-tax contributions
Check if your employer’s 401(k) plan allows after-tax contributions. (If not, you won’t be able to perform a mega backdoor Roth IRA)
Step 2: Determine the max amount of after-tax contributions you can make
For 2023, the maximum amount of contributions to your 401(k) plan is $62,000, or $69,000 if you’re over 50 years old. This includes both your pre-tax and after-tax contributions, as well as any employer contributions.
Step 3: Make after-tax contributions to your 401(k) plan
Make after-tax contributions to your 401(k) plan, up to the maximum allowed amount. Remember that you’ll still be subject to the annual contribution limits for pre-tax and Roth contributions.
Step 4: Convert after-tax contributions to Roth IRA
Once you’ve made after-tax contributions to your 401(k) plan, you can convert them to your Roth IRA. Contact your plan administrator and request a direct rollover of your after-tax contributions to your Roth IRA. Complete any necessary paperwork and follow any specific instructions provided by your plan administrator.
Step 5: Pay taxes on any pre-tax contributions
If you have any pre-tax contributions in your 401(k) plan, you’ll need to pay taxes on them when you convert your after-tax contributions to your Roth IRA. The amount of taxes you’ll need to pay will depend on your income tax rate and the amount of pre-tax contributions you have.
Step 6: Repeat the process each year
Repeat the process of making after-tax contributions to your 401(k) plan and converting them to your Roth IRA each year to continue building your retirement savings in a tax-efficient way.
Conclusion
In summary, a mega backdoor Roth IRA involves making after-tax contributions to your 401(k) plan and then converting them to your Roth IRA. This strategy can be an effective way to boost your retirement savings if you earn a high income and have already maxed out your regular Roth IRA contributions. However, it’s important to consult with a financial advisor or tax professional to ensure this strategy is appropriate for your specific financial situation.
If you are trying to do a mega backdoor roth, planning for retirement, or just for more information – get booked for a call with your Booked Financial Rep
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This tax information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Booked Financial LLC recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.