Mega Backdoor Roth IRA: Is It Really Mega?

The backdoor option was designed for high-income earners to make a regular Roth contribution using tax-deferred earnings. In contrast, the mega backdoor Roth IRA was designed for after-tax contributions to a 401(k) to convert to a Roth IRA.

What Is an Individual Retirement Account (IRA)? An individual retirement account (IRA) is a savings and investment account with tax advantages. A traditional IRA uses pre-taxed dollars, while a Roth IRA uses after-tax dollars. As a result, they both have tax savings, either now or later.

Roth IRA Versus Traditional IRA A Roth IRA is an individual retirement account (IRA) funded with after-tax dollars. It allows funds to grow over time without incurring taxes on the profits. In other words, withdrawals aren’t taxed during retirement, leaving more money in the pockets of retirees.

Backdoor Roth IRA The backdoor Roth IRA allows high-income earners to transfer funds from a traditional IRA to a Roth IRA. Individuals must pay taxes on the money that is transferred (since they didn’t pay taxes on the original contribution) and may transfer up to the maximum $6,000 contribution limit for individuals younger than 50 years of age ($7,000 for those over 50 years of age).

Mega Backdoor Roth IRA

The Mega Backdoor Roth IRA allows you to supercharge your investments. After maximizing your contributions to a traditional 401(k) ($19,500 for anyone under age 50, $25,000 for anyone over age 50), you can contribute after-tax dollars up to the annual maximum (employee and employer-match) contribution if your employer plan allows it.

Benefits of a Mega Backdoor Roth IRA The Mega Backdoor Roth IRA has benefits for the right person. Here are a few: 1. It can rapidly increase overall retirement savings rates. 2. The Mega Backdoor Roth IRA allows for significant tax-deferred growth when done correctly.

Cons of the Mega Backdoor Roth IRA The Mega Backdoor option isn’t without cons. Take a look at this list for more details: 1. It’s not easy to contribute beyond the tax-deferred contributions. 2. Not all employers offer Rollover Roth IRA options. 3. Regulations may change. 4. Withdrawals are subject to the Pro-Rata Rule.

Who’s Eligible for a Mega Backdoor Roth? Individuals investing in a Mega Backdoor Roth IRA earn more than $144,000 annually (the max income for a Roth IRA for singles, $214,000 married filing jointly). They must have sufficient income to pay their expenses while investing more than $20,500 in their traditional employer-sponsored 401(k) plan.

The Mega Backdoor Roth IRA is a mega-savings option for high-income earners. It opens the doors to high savings rates and significant tax savings over time. However, this option is complicated. Individuals will need to weigh the pros and cons or consider working with a financial advisor or tax advisor for help.

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