Is the Mega Backdoor Roth That Big a Deal?

The Mega Backdoor Roth takes investing in a traditional 401(k) to the next level for high-income earners. If you meet the eligibility requirements, you could stash an extra $41,500 for retirement in a Roth IRA.

What Is an Individual Retirement Account (IRA)?

An individual retirement account (IRA) is a savings and investment account with tax advantages. A traditional IRA uses pre-taxed dollars, while a Roth IRA uses after-tax dollars.

Roth IRA Versus Traditional IRA

A Roth IRA is an individual retirement account (IRA) funded with after-tax dollars. It allows funds to grow over time without incurring taxes on the profits. The traditional IRA offers an upfront tax-deduction on contributions with taxable withdrawals during retirement. However, It doesn’t come with income limits.

Backdoor Roth IRA

The backdoor Roth IRA allows high-income earners to transfer funds from a traditional IRA to a Roth IRA.

Here’s are the basics to follow:

1. No other pre-tax IRA accounts. 2. Contribute to a traditional IRA. 3. Convert the traditional IRA to a Roth IRA.

Mega Backdoor Roth IRA

The Mega Backdoor Roth IRA allows you to supercharge your investments. After maximizing your contributions to a traditional 401(k) ($19,500 for anyone under age 50, $25,000 for anyone over age 50), you can contribute after-tax dollars up to the annual maximum (employee and employer-match) contribution if your employer plan allows it.

The Mega Backdoor Roth IRA is complicated. However, here are the basic principles:

1. Your company must offer the option to make after-tax contributions to your 401(k). 2. Your company must allow your 401(k) conversions to a Roth IRA. 3. You have to max out your traditional 401(k) contributions. 4. You have the funds available to contribute additional money to your 401(k).

Benefits of a Mega Backdoor Roth IRA

1. It can rapidly increase overall retirement savings rates. After maximizing their annual contribution limits, individuals investing in their 401(k) save more than $20K a year for retirement. 2. The Mega Backdoor Roth IRA allows for significant tax-deferred growth when done correctly. The result is significant tax savings.

Cons of the Mega Backdoor Roth IRA

1. It’s not easy to contribute beyond the tax-deferred contributions. 2. Not all employers offer Rollover Roth IRA options. 3. Regulations may change. 4. Withdrawals are subject to the Pro-Rata Rule.

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