Let me start this off by stating- Most of us don’t need the Mega Backdoor Roth IRA. I will second that statement by stating that Most of us CAN’T have a Mega Backdoor Roth IRA.
With that out of the way, lets explain what a Mega Backdoor Roth is:
A Mega Backdoor Roth is essentially a strategy that allows you to contribute an additional $37,500 to a Roth IRA every year. This is in addition to the regular contribution limits for these accounts. Make no mistake about it, this is a complicated strategy that will allow you to save more money for retirement, and these funds will grow tax free and you will not pay taxes on the contributions or the earnings they make as long as you follow the rules.
WHO SHOULD CONSIDER THE MEGA BACKDOOR STRATEGY?
- An employee with an extremely unique 401(k) plan
- High Income taxpayers who expect to be in a top tax bracket in retirement
- Self Employed individuals who would like to contribute more money to Roth Option
WHAT DO YOU NEED IN ORDER TO IMPLEMENT THIS STRATEGY?
- A 401(k) plan that allows “after-tax contributions”. This terminology does not refer to having the ability to contribute to your Roth 401(k), this is a completely separate bucket
- Your employer offers either in-service distributions to a Roth IRA OR lets you move money from the after-tax bucket of your plan into the Roth 401(k) part of the plan
- Most Importantly- you have the financial ability. This should only be considered if you are already maxing out your retirement plan contributions, have a nest egg built up, have saved for your non retirement goals and now have extra money set aside to invest for retirement
Make no mistake about it, this is a complicated strategy that is not available in most retirement plans, however, if you are a business owner, you may be able to adopt a plan that allows for this option. We can help you in that endeavor, we have intimate knowledge of this strategy as well as other strategies that might help you reach your goals.
