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. 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. 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. 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. 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). However, the IRS released guidance that specifically addressed both backdoor Roth IRA conversions, and the so-called Mega Backdoor Roth IRA.As a result, it has gained even more popularity and interest. Now I'm wondering if it's worth it. Is the Backdoor Roth Worth the Trouble? Mega backdoor roth ira, worth it? If you have not maxed it out, you do not qualify for the Mega Backdoor. Max out other tax-advantaged accounts first. The answer is probably not, but it’s worth checking. You can only convert $7,000 to your Roth in 2020 using the backdoor Roth strategy. After these rave reviews, shouldn’t everyone with the Mega Backdoor Roth option use it? With an MBR, contributions are tied up for 5 years (it’s treated as a conversion), and gains until 59.5. Missing out on the tax deduction is a downside. What is A Mega Backdoor Roth Conversion? That was one of the reasons that I went with the Mega Backdoor route rather than a regular brokerage account. 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. 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. This is a potential strategy if you are looking for ways to optimize your long-term savings strategy and create additional tax diversification. For 2020, those limits are $19,500 and an additional $6,500 for those over the age of 50. This gives savers greater access to Roth contributions than if they relied strictly on direct Roth 401(k) and IRA contributions. The backdoor Roth IRA is designed for individuals whose income exceeds the IRS limit for making Roth IRA contributions directly. The mega backdoor Roth is simply the company retirement plan version of the backdoor Roth IRA. 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). You will have to pay Social Security and Medicare taxes, though. Reply If you are 50 or older, have you contributed $26,000? 1. The after-tax contributions effectively become Roth IRA contributions. The Mega Backdoor Roth IRA is achieved by contributing additional after-tax money to a 401(k), and then rolling those contributions into a Roth IRA. After some research on the topic, I decided to take advantage. Additional Complexity Using a Mega Backdoor Roth IRA. For a long time, it was an unspoken secret used by retirement planners. If you have access to a Roth 401k at work, you can decide whether to rollover the funds into this Roth 401k or a separate Roth IRA. 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. Also, since you contributed to the 401(k) with after-tax contributions, you won’t pay income taxes when you convert. It's a few more steps, and there are specific rules about who has access to this. 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. First saving $53,000 in a year isn’t easy, even if you’re a high-income earner. A mega backdoor Roth conversion is very different than the standard backdoor Roth IRA conversion. 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. 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. 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. If you can check all three boxes, let me introduce and explain the Mega Backdoor Roth strategy. Are the non-Roth after-tax contributions moved to a separate account? I make ~200K / year including bonuses, etc. 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. 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. It’s a complicated process, but the results are well worth it if you can make it work. The main benefit of a mega backdoor Roth over a standard backdoor Roth is that you can contribute a much larger amount. The mega backdoor Roth allows some investors to contribute as much as $37,500 extra (for 2020) to a Roth IRA. 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. This happens via their employer’s 401k plan if the plan allows after-tax contributions over and above the limit on employee contributions. I was excited to see my job support the mega backdoor Roth in their 401k last year and immediately took advantage of it.
is mega backdoor roth worth it 2021