Mega Backdoor Roth: Supercharge Your After-Tax Retirement Contributions

?? The Mega Backdoor Roth is an advanced retirement savings strategy that, when used correctly, can significantly enhance your retirement savings and reduce your lifetime effective tax rate

Here, we've compiled essential information to help you understand this strategy and its implications:

1. What is the Mega Backdoor Roth?
2. Key Points to Consider
3. Determining Eligibility
4. Implications and Reporting Requirements

What is the Mega Backdoor Roth?

The Mega Backdoor Roth combines elements of traditional 401K and Roth IRA retirement accounts to supercharge your retirement savings. It involves making after-tax contributions to a designated retirement account, such as a 401(k), and then rolling these funds over into a Roth IRA.

Key Points to Consider

Amplified Contribution Limits

One of the most enticing benefits of the Mega Backdoor Roth is the ability to contribute beyond the standard limits of a traditional Roth IRA. For many individuals, the annual contribution limits for Roth IRAs are limited to $7,000 (2024) and subject to income restrictions. With a mega backdoor Roth, you can potentially contribute significantly more money toward your retirement, allowing for accelerated growth.

Tax-Free Growth and Withdrawals

Contributions to a Roth IRA are made with after-tax dollars, meaning you've already paid taxes on that money. As a result, your investment grows tax-free, and upon retirement, qualified withdrawals are also tax-free. The Mega Backdoor Roth extends these benefits, enabling more contributions to grow tax-free over time.

Diversification and Flexibility

By utilizing the Mega Backdoor Roth, you diversify your retirement portfolio. Having a mix of taxable, tax-deferred, and tax-free accounts provides flexibility in managing taxes during retirement. It allows you to strategically withdraw from different account types, potentially reducing your tax burden and lifetime effective tax.

Determining Eligibility

Not all employer-sponsored retirement plans permit mega backdoor Roth contributions. Understanding your specific plan's rules is crucial before pursuing this strategy.

To determine if you're eligible for the Mega Backdoor Roth contributions:

• Review your employer-sponsored retirement plan documents to confirm if after-tax contributions (Roth 401K) and in-service withdrawals are permitted.
• Your Summary Plan Description (SPD) or other materials should outline the rules regarding after-tax contributions and in-service withdrawals. Consult your HR department or plan administrator for clarification on plan rules, limitations and next steps to implement your desired contributions.

Tax Implications and Reporting Requirements:

Contribution limitations

• The total employee elective deferral limit for 401(k) plans is limited to $23,000 per individual under 50 years old.
• The total contribution limit to employer-sponsored plans (including employee contributions, employer matches, and after-tax contributions) must not exceed $69,000 for 2024 ($76,500 for individuals over 50).

Tax Impact

• Upon conversion to a Roth IRA, the after-tax contributions will not be taxed again since they were made with after-tax dollars. However, any earnings or growth on those contributions will be subject to taxation upon conversion if not already included in the basis.
• If you have both pre-tax and after-tax funds in IRA accounts before conversion, your conversion may be subject to the pro-rata rule. This means the conversion will contain a proportional mix of pre-tax and after-tax funds, potentially leading to tax consequences.

Reporting Requirements

• When conducting a conversion from an employer plan to a Roth IRA, you will receive a Form 1099-R, which reports the distribution. You will need to report this conversion on your tax return.

???If you’re interested in Mega Backdoor Roth Contributions, reach out to our team by scheduling an intro call.

?? Already a Gelt customer? Contact our tax team at?[email protected]

This information is for educational purposes only and does not constitute financial advice. Consult a qualified professional before making any investment decisions.

???References

IRC Section 408

IRC Section 402(g)