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.
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 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.
The Mega Backdoor Roth IRA is complicated. However, here are the basic principles:
1. Your company must offer the option to make after-tax contributions to your 401(k).2. Your company must allow your 401(k) conversions to a Roth IRA.3. You have to max out your traditional 401(k) contributions.4. You have the funds available to contribute additional money to your 401(k).
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.