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Mega Backdoor Roth: Tax Saving Retirement Planning for High-Earners

| April 06, 2020
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The elusive Mega Backdoor Roth is no longer a secret only available to retirement planners. Since the IRS released guidance that addressed backdoor Roth IRA conversions and the Mega Backdoor Roth IRA, it has gained traction amongst employees of large companies.

Since every individual's retirement plan is unique, this won’t apply to everyone. We’ll be breaking down what the Mega Backdoor Roth is, how it works and who it applies to below. 

What Is a Mega Backdoor Roth?

The Mega Backdoor Roth is a great opportunity for high-income earners to funnel additional savings into a Roth IRA. When considering a Mega Backdoor Roth IRA, it is important to work with a CERTIFIED FINANCIAL PLANNER professional to avoid any unforeseen tax penalties as it is a very complicated option with many moving parts. There are many contribution types at play that all work together to reach an aggregate plan limit for an individual. It’s important to have a comprehensive financial plan to see if this particular strategy is viable for you. 

Who Can Use a Mega Backdoor Roth?

Usually, retirement plans from larger employers allow employees to make after-tax contributions, up to a certain limit, to their 401(k). If you are a high earner with extra savings and can afford to contribute above the 401(k) maximum of $19,500, with an additional $6,500 if you are 50+ (for 2020), then the Mega Backdoor Roth may be right for you. 

Let’s say you’re an employee at a large and established company and you max out your 401(k).  For example, let’s assume your employer gives you a matching contribution of $6,000. If the plan allows for it and you have the cash flow to do it, you may have $31,500 available to fund an after-tax contribution ($37,500 is the max contribution after the $6,000 your employer puts in, on top of the regular contribution limits for those accounts). 

Why It Can Make Sense for You

For each individual, there are numerous types of contributions and limits. However, the benefits can be worth it -- your after-tax contribution can grow and you may have the opportunity to withdraw the amount you contributed tax-free. Work with your CFP® Professional to see if and how the Mega Backdoor Roth can help you boost your retirement savings and reach your future financial goals.

Takeaways

There are several questions you should ask when considering a Mega Backdoor Roth:

  • Does my retirement plan permit after-tax contributions?
  • Can I afford the additional contribution?
  • Do the long-term benefits outweigh the short-term cash impact?
  • Is the Mega Backdoor Roth a viable strategy for me?

Financial planning can be complex. But that doesn’t mean you should miss out on potentially viable opportunities. Our experts at RMR can help you evaluate your options. Reach out to us today!

 

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