Mega Backdoor Roth Explained

Many individuals may have heard of a back-door Roth IRA contribution, but most are probably not aware of what a Mega Backdoor Roth is.

Roth IRA and a Roth election within a 401k are two separate things. The Roth IRA contribution limit in 2020 is $6,000 (and $7,000 if you’re over 50). A Roth 401k is subject to the annual 401k limits, currently $19,500 for 2020 ($26,000 if you’re over 50).

Backdoor Roth (Personal IRA)

The annual income limit to contribute to a Roth IRA in 2020 is $206,000 for married couples and $139,000 for single filers. For those that still want to contribute to a Roth above these limits, there is a method called the Backdoor Roth. This involves making an after-tax contribution to a traditional IRA account, then converting some or all of the money in the account to a Roth IRA. This transaction is tax free because no tax deduction was taken at the contribution into the IRA and no earnings were made prior to the conversion to the Roth. You can contribute the maximum to the IRA for you and your spouse, then convert both contributions immediately into each person’s Roth.

It is important to remember that if you have an IRA that is already funded then you would have to convert those funds first, which will be taxed at your normal income rate, thus we advise that you consult with a financial advisor or a tax professional prior to converting an IRA with rollover funds or prior contributions.

Mega Backdoor Roth (401k)

A mega backdoor Roth requires two conditions from your employer.  Your 401k must allow you to make after-tax contributions and your employer must allow in-service withdrawals.

Plain and simple, a mega backdoor Roth is a technique that allows employees to contribute larger after-tax amounts to a 401k and then convert those amounts to the Roth 401k. This process allows the employee to contribute up to an extra $37,500 for 2020 to a Roth in their employer’s 401k, if the 401k allows for after-tax contributions over and above the employee contribution limits. Contribution limits are $19,500 for 2020 and $26,000 for those who are 50 or over.

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Casey Smith is owner and president of Wiser® Wealth Management, a wealth management firm based in Marietta, GA.  Wiser® Wealth Management helps clients identify, understand, and commit ...

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