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What is a Mega Backdoor Roth?

By Michael Hoffman. © Verdence Capital Advisors

Many people believe that they make too much money to put money into a Roth IRA. However, even with an income over $208,000, you can do so with the Backdoor Roth IRA contribution.  The backdoor Roth contribution takes just one extra step: making a non-deductible IRA contribution and then immediately converting that contribution to the Roth IRA. One important thing to note is for this to be a non-taxable event your IRA cannot have any current value.

In addition, there is the lesser-known “Mega Backdoor Roth,” which is the supersized backdoor option that allows you to put up to an extra $38,500 in your Roth 401K or Roth IRA account over and above your annual $19,500 contribution limit.

Rules for making contributions to your Mega Backdoor Roth are specific to each 401K retirement plan. Namely, your retirement plan needs to have the voluntary after-tax bucket and either allow for “in-plan conversions” or “in-service distributions.” If that is the case, you can make large Roth IRA or Roth 401k contributions just by taking one extra step.

There is a $58,000 total limit on all 401K contributions. The simplest way to calculate this is to break your 401K contributions into three columns: what you have put into your account, what your company has contributed, and the difference between those two numbers. That is the amount you should be able to add, with the $58,000 total in mind.

Then the one extra step is this: You will need to make an after tax contribution into your 401k  and then immediately roll the money out of the after-tax bucket before it starts making any earnings into your Roth 401K if your plan only allows for in-plan conversions or a Roth IRA if your plan allows for the in-service distributions.

If you have any questions or are interested in creating a new Mega backdoor feature for your account, feel free to reach out to Michael Hoffman, Director of Financial Planning, or anyone at Verdence.

 

 

Disclaimer:

This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and data in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness. VCA has not independently verified third-party sourced information and data. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. This material is being provided for informational purposes only and is not intended to provide, and should not be relied upon for, investment, accounting, legal, or tax advice. 

Past performance is not a guarantee of future results.

Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly in these materials will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any discussion or information contained in this report serves as the receipt of, or as a substitute for, personalized investment advice from VCA. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses.

 

 

 

By Michael Hoffman