The Mega Backdoor Roth takes investing in a traditional 401(k) to the next level for high-income earners. If you meet the eligibility requirements, you could stash an extra $41,500 for retirement in a Roth IRA. However, it’s complicated, and mistakes can be costly.
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.
You can open an IRA through a bank, investment brokerage, or employer. Through employers, IRAs are 401k, Roth 401k, 403b, Roth 403b, Thrift Savings Plan, or SEP (Simplified employee pension).
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. The traditional IRA offers an upfront tax-deduction on contributions with taxable withdrawals during retirement. However, It doesn’t come with income limits.
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).
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.
1. It can rapidly increase overall retirement savings rates. After maximizing their annual contribution limits, individuals investing in their 401(k) save more than $20K a year for retirement. 2. The Mega Backdoor Roth IRA allows for significant tax-deferred growth when done correctly. The result is significant tax savings.