Looking for a way to supercharge your retirement savings? A mega backdoor Roth IRA might be the perfect fit for you. But what is it and how does it work?
A mega backdoor Roth IRA is a way to contribute more money to a Roth IRA than the annual contribution limit. It involves making after-tax contributions to your 401(k) plan, then converting those contributions to a Roth IRA.
To qualify for a mega backdoor Roth IRA, your 401(k) plan must allow for after-tax contributions and in-service conversions. If your plan does, here's how to get started:
- Max out your pre-tax 401(k) contributions.
- Make after-tax contributions to your 401(k) plan up to the total contribution limit (pre-tax, after-tax, employer matching, employer contribution) minus your pre-tax contribution limit and employer matching contributions.
- Convert your after-tax 401(k) contributions to a Roth IRA.
It's important to note that you may have to pay income taxes on any earnings generated by your after-tax 401(k) contributions before you convert them to a Roth IRA. But once you convert them to a Roth IRA, they'll grow tax-free and you can withdraw them tax-free in retirement.
Here's an example of how a mega backdoor Roth IRA can help you grow your retirement savings:
Let's say you're 40 years old and you're able to contribute the maximum amount to a mega backdoor Roth IRA each year ($66,000 in 2023). If you earn a 7% annual return on your investments, your mega backdoor Roth IRA would be worth over $1 million by the time you retire at age 65.
If you're interested in a mega backdoor Roth IRA, talk to your plan administrator to see if your plan allows for it. And be sure to consult with a financial advisor to make sure it's the right strategy for your individual situation.
Here are some additional benefits of a mega backdoor Roth IRA:
- It can help you diversify your retirement income stream.
- It can help you reach your retirement savings goals faster.
- It can help you pass on tax-free wealth to your heirs.
If you're looking for a way to supercharge your retirement savings, a mega backdoor Roth IRA is a great option to consider.
[Originally Posted Aug 29, 2022, Updated November 15, 2023].