Mega Backdoor Roth: What It Is and How It Works

If you're looking for a way to save more for retirement than what traditional 401(k) or IRA accounts allow, a mega backdoor Roth might be worth considering. This is a strategy that enables individuals to contribute significantly more after-tax dollars to their retirement accounts than they would be able to otherwise.

What is a Mega Backdoor Roth?

A mega backdoor Roth is a way to contribute more money to a Roth IRA account beyond the annual contribution limit. This strategy involves making after-tax contributions to a 401(k) plan, then rolling over those contributions to a Roth IRA account.

How Does It Work?

Here's a step-by-step breakdown of how the mega backdoor Roth strategy works:

1. Check if your employer's 401(k) plan allows for after-tax contributions: Not all 401(k) plans allow after-tax contributions, so it's important to check with your plan administrator to see if this option is available.
2. Contribute to your 401(k) plan: If your plan allows after-tax contributions, you can contribute up to $58,000 in 2021, including the employee contribution limit of $19,500, employer contributions, and any catch-up contributions for those over 50 years old.
3. Roll over after-tax contributions to a Roth IRA: Once you've made after-tax contributions to your 401(k) plan, you can roll over those contributions into a Roth IRA account. This can be done either while you're still employed or after you've left your job.
4. Pay taxes: Because the after-tax contributions have already been taxed, you won't owe taxes on the amount you roll over to the Roth IRA. However, any earnings on the after-tax contributions will be subject to taxes.
5. Enjoy tax-free growth: Once the funds are in your Roth IRA, they'll grow tax-free. And when you withdraw them in retirement, you won't owe any taxes on the contributions or the earnings.

Benefits of a Mega Backdoor Roth

The main benefit of a mega backdoor Roth is the ability to contribute significantly more after-tax dollars to a retirement account. This strategy also provides tax-free growth on your contributions, which can help increase your retirement savings.

It's important to note that a mega backdoor Roth strategy might not be suitable for everyone. It's recommended to consult with a financial advisor to determine if this strategy aligns with your retirement goals and financial situation.

In conclusion, a mega backdoor Roth is a strategy that can help you boost your retirement savings beyond traditional contribution limits. By making after-tax contributions to your 401(k) plan and rolling them over to a Roth IRA, you can benefit from tax-free growth on your retirement savings.

If you have questions about how to take advantage of retirement savings or any aspect of personal financial planning, CONTACT a CFP® Professional at RGA TODAY!