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. However, it’s complicated, and mistakes can be costly.
Although the mega option is similar to the backdoor Roth IRA, they’re two distinct accounts. Even though they’re both designed for high-income earners to convert a traditional IRA fund to a Roth, they do things differently.
The backdoor option was designed for high-income earners to make a regular Roth contribution using tax-deferred earnings.
In contrast, the mega backdoor Roth IRA was designed for after-tax contributions to a 401(k) to convert to a Roth IRA.
You could call the mega backdoor option mega as it offers a more considerable after-tax contribution into a Roth IRA.
However, it’s not for everyone. The choice comes with a few limitations. Nevertheless, it works great for some. So, it’s worth learning about it. In this article, we’ll talk about the basic rules of a Mega Backdoor Roth to see how it works in 2022.
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. As a result, they both have tax savings, either now or later.
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. In other words, withdrawals aren’t taxed during retirement, leaving more money in the pockets of retirees.
The backdoor Roth IRA allows high-income earners to transfer funds from a traditional IRA to a Roth IRA. Individuals must pay taxes on the money that is transferred (since they didn’t pay taxes on the original contribution) and may transfer up to the maximum $6,000 contribution limit for individuals younger than 50 years of age ($7,000 for those over 50 years of age).