Home Personal Finance Is the ‘mega backdoor Roth’ the right retirement savings choice for you?

Is the ‘mega backdoor Roth’ the right retirement savings choice for you?

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There are many strategies for getting the most out of your Roth IRA or 401(k) contributions. This includes the rather discreet Mega Backdoor Roth. This saves you tens of thousands of additional tax-free dollars each year. In fact, for those with an Individual Retirement Account (IRA) who maximize employee deferrals to a 401(k) and whose income exceeds the Roth IRA limit, the giant backdoor Roth is It can be a formidable option. (Looking for a new financial advisor? This tool will help you find an advisor that fits your needs.)

Ashley Weeks, vice president and wealth strategist at TD Wealth, says one key consideration before taking the plunge is assessing whether the effort required is worth the payoff. . “The execution of the strategy is fairly complex and requires a series of deals that are unfamiliar to a retirement plan sponsor,” said Weeks, adding that “employees have a lot of work to do to execute a strategy with an employer in mind.” patience and persistence will likely be required,” he added. We also allow after-tax employee contributions. ”

Because of its complexity, Weeks adds that it might be best to work with experts. “Consultation with an experienced tax accountant is also necessary, especially if the strategy includes both pre-tax and after-tax funds from his 401(k),” Weeks says. .

If you’re up to the challenge and are actually maxing out your qualifying retirement savings, it’s helpful to learn more about traditional IRAs and Roth first.

Roth vs Traditional IRA

The main difference between a Roth and a traditional IRA is the method of taxation. The Roth IRA design is fairly simple. If you deposit a certain amount of after-tax dollars by the April deadline each year, the cash is tax-free. You can withdraw money without penalty after age 59½ as long as the account has been open for at least 5 years (read below) more minimum distribution (RMD) rule required on the IRS website). This year, Roth’s maximum donation limit is his $6,500, and individuals over the age of 50 is his $7,500.

Using traditional IRAs, investors deposit pre-tax dollars into their accounts. Tax requirements are deferred until retirement, at which time investors must pay income tax on these savings.

Another important piece of information here is that both Roth accounts and traditional IRA accounts have income. LimitationsIf your 2023 adjusted adjusted gross income or adjusted AGI exceeds $138,000 and $153,000 for single filers and $218,000 and $228,000 for joint filers, you are not eligible for Roth.

For clarity, single filers with income less than $138,000 are eligible to contribute up to the cap, those with income between $138,000 and $153,000 are eligible to contribute the reduced amount, and no more. Those with income cannot contribute, the IRS says. A marriage return joint taxpayer with total income less than her $218,000 is eligible to contribute up to the cap. Couples with incomes between $218,000 and $228,000 can contribute a reduced amount, and couples with incomes above $228,000 cannot contribute at all. (Looking for a new financial advisor? This tool will help you find an advisor that fits your needs.)

backdoor ross

For those who cannot contribute directly to a Roth IRA due to modified AGI restrictions, a backdoor Roth IRA is one way to break down these barriers. To set it up, you must first contribute to a traditional IRA. Then, when you reach the maximum amount allowed for that account, roll over that balance to your Roth IRA. It should be noted that only after-tax dollars can enter a Roth IRA. If you have already deducted contributions to your traditional IRA, you must return the deducted amount. Also note that money earned as a result of market performance before converting to loss is subject to tax.

An alternative strategy for those whose 401(k) plan qualifies for automatic Roth conversion is to make after-tax contributions and have them automatically converted to Roth.

Mega Backdoor Ross

Now, here’s how to satisfy Roth’s maximum. If you are a single filer with an income of $153,000 or more, or if you file as a couple and are a joint taxpayer with an annual income of $228,000 or more and cannot contribute directly to the Roth IRA, this will save your One way. That’s double the amount of normal backdoor Roth. (Looking for a new financial advisor? This tool will help you find an advisor that fits your needs.)

First, you must have a traditional 401(k) sponsored by your employer. This allows for after-tax contributions and withdrawals while working. Note that only a limited number of companies allow this, including Google, Facebook, Adobe, and AT&T (see below for how to check if you’re eligible).

Your employer must allow so-called in-plan loss conversions, where the company’s after-tax contributions are incorporated into the plan’s current loss segment. Alternatively, the employee rolls these funds out of the plan and into the Roth IRA. If your company provides this, contribute the maximum after-tax amount to your 401(k) or other workplace retirement plan for the year and convert it to a Roth IRA or Roth 401(k) . In 2023, the regular 401(k) contribution limit is $22,500, or $30,000 if you’re 50 or older. Please note that dollars from the employer’s match must be deducted.

However, if you do not get an employer match, you can add an additional $43,500 to your 401(k) account to qualify for the after-tax match yourself. In 2023, one filer will make her $66,000, and an individual over 50, he will make $73,500.

This is where additional transactions really come into play. To enact the Mega Backdoor Roth Strategy, all after-tax dollars are rolled back into a Roth IRA so that the sum is tax-free. If you have a Roth 401(k) through your employer, you may be able to choose between a Roth IRA or a 401(k). But if your employer only provides her traditional 401(k), you can only incorporate it into your Roth IRA. If you can roll over quickly, you can avoid growing your account and pay minimal taxes on your earnings. That said, if an after-tax amount is invested in the year and you convert at the end of the year, that amount is taxable.

For this strategy, Tobias Financial Advisors Senior Wealth Advisor and CEO Marianela Collado says there must be very specific opportunities available. “Not all plans allow for after-tax contributions, and not all plans allow for loss conversion within the plan,” Corrado said, noting that the plan is actually a “savings It’s for “those who have excess cash to spare and have run out of the next pecking order,” he added. About savings:

  1. 401(k) until required match
  2. medical savings account limit
  3. Usual Roth IRA Contribution or Usual Backdoor Roth
  4. Contribution up to 401(k)
  5. after tax

If you choose this route, it is important to ensure that your 401(k) plan can accommodate these after-tax dollar loss conversions without the need to apply pro rata rules, i. (k) All that comes from buckets of money.” I need to call my client’s 401(k) provider to clarify, but still the 1099 issued is all wrong. (Looking for a new financial advisor? This tool will help you find an advisor that fits your needs.)

How to know if I have access?

For more information on retirement plans, Brief plan description — An important document telling participants what the plan offers and how it operates, and what all employees of the company have access to. Two important features should be looked for in this part of the planning document.

  1. After-tax contributions are allowed
  2. Roth conversion available within the plan: This savings strategy is most valuable when your after-tax dollars are immediately converted to Roth dollars. Loss donations are tax-free, and tax-free withdrawals are also possible.First post-tax contribution will be taxed for growth at time of withdrawal

Bryan Hasling, Certified Financial Planner at Lodestar Private Asset Management, said: (Use this tool to find a financial advisor who can help.).

Who is this savings strategy good (and bad) for?

Ultimately, the Mega Backdoor Roth plan is all about saving more cash. This is so much that it is not an option for many people. According to 2021, just over 52% of his Americans will have an annual household income less than his $75,000. data From Statista. In 2021, just 19.9% ​​of American household incomes were above his $150,000.

Still, Hasling assures us that even if this strategy were available, utilizing Mega Backdoor Roth would not have to be a successful retirement saver. “Retirement accounts can be very effective if you keep investing for decades,” says Hasling, adding, “The more money you invest strategically, the sooner you may reach financial freedom. There is,” he adds.

Even if you don’t qualify, Weeks says there are actually many alternative options available if you want to contribute more for the future. “A taxable brokerage account is a great place to save for retirement,” Weeks explains, adding, “Don’t overlook income tax incentives for long-term capital gains and qualified dividends in a brokerage account.” Added. (Looking for a new financial advisor? This tool will help you find an advisor that fits your needs.)

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