What is a mega backdoor Roth?

 © 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, there is one extra step: You will need to make an after-tax contribution to 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 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 Kelly Wright, Director of Financial Planning, or anyone at Verdence.




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