A unique kind of 401(k) rollover technique called a “mega backdoor Roth” is employed by wealthy individuals to contribute money to a Roth individual retirement account (IRA) or Roth 401(k). This approach is only effective in very specific situations for those who have a sizable amount of extra cash that they would like to stash in a Roth IRA.
Roger Young, a thought leadership director for T, says, “You won’t have to pay taxes on investment earnings or capital gains like you would with a taxable account by converting the after-tax contribution to a Roth account and taking qualified distributions later.” Rowe Price.
Prior to explaining the mega backdoor Roth, it is important to comprehend the general workings of backdoor Roth IRA conversions and Roth retirement accounts.
Contributions to Roth retirement accounts, such as the Roth 401(k) and Roth IRA, are permitted if you have already paid income taxes on the funds. These contributions grow tax-free, and when you make future qualified withdrawals, you don’t have to pay any income tax.
You can contribute to a Roth 401(k) through your employer, regardless of your annual income, if one is available. However, not everyone qualifies to make contributions to a Roth IRA. Your income must fall within one of the following ranges in order to contribute to a Roth:
If these requirements are satisfied, you may make contributions of up to $6,500 in 2023. If you are fifty years of age or older, you can contribute up to an extra $1,000. For 2024, the maximum yearly contribution is $7,000, plus an additional $1,000 if you’re fifty years of age or older.
You could make an annual contribution of up to $6,000 ($7,000 if you’re 50 or older) in 2021 and 2022.
What is a Super Roth?
The Super Roth, also known as the mega backdoor Roth, is a powerful retirement savings strategy that allows individuals to contribute significantly more money to their retirement accounts than traditional Roth IRA limits allow. This strategy is particularly beneficial for high-income earners who are unable to contribute directly to a Roth IRA due to income restrictions.
How does a Super Roth work?
The Super Roth leverages two key features of certain 401(k) plans:
- After-tax contributions: This allows you to contribute additional funds to your 401(k) beyond the regular contribution limits, using after-tax dollars (money you’ve already paid taxes on).
- In-service distributions or rollovers: This allows you to withdraw your after-tax contributions and any associated earnings from your 401(k) while you’re still working and roll them over to a Roth IRA.
Benefits of a Super Roth:
- Tax-free growth: Unlike traditional IRAs, the money in your Super Roth grows tax-free, meaning you won’t owe any taxes on the investment earnings.
- Tax-free withdrawals: In retirement, you can withdraw your contributions and earnings tax-free, providing a significant tax advantage over traditional IRAs.
- Higher contribution limits: Compared to the $6,500 annual contribution limit for Roth IRAs in 2023, the Super Roth allows you to contribute significantly more, up to the combined limit of $66,000 for 2023 ($73,500 for those 50 and older).
Requirements for a Super Roth:
- Eligible 401(k) plan: Your 401(k) plan must allow after-tax contributions and in-service distributions or rollovers to a Roth IRA.
- High income: This strategy is most beneficial for high-income earners who are unable to contribute directly to a Roth IRA due to income restrictions.
- Available funds: You must have additional funds available to contribute beyond your regular 401(k) and Roth IRA contributions.
Potential drawbacks:
- Complexity: The Super Roth can be a complex strategy, and it’s important to understand the rules and requirements before implementing it.
- Tax implications: If you withdraw your earnings before age 59 1/2, you may owe taxes and penalties on the earnings portion.
- Limited availability: Not all 401(k) plans offer the features required for a Super Roth.
Is a Super Roth right for you?
If you are a high-income earner with access to a 401(k) plan that allows after-tax contributions and in-service distributions or rollovers, the Super Roth can be a powerful tool for boosting your retirement savings and achieving tax-free growth and withdrawals. However, it’s important to carefully consider the requirements, potential drawbacks, and your individual financial situation before deciding if this strategy is right for you. Consulting with a financial advisor can help you determine if the Super Roth is a suitable option for your retirement planning goals.
Additional considerations:
- Tax-free growth vs. tax-deductible contributions: While the Super Roth offers tax-free growth, traditional IRAs offer tax-deductible contributions, which can provide immediate tax savings.
- Contribution limits: The Super Roth has higher contribution limits than Roth IRAs, but it’s important to remember that overall contribution limits for all retirement accounts still apply.
- Investment options: The investment options available in your 401(k) plan may be limited compared to those available in a Roth IRA.
The Super Roth is a valuable strategy for high-income earners seeking to maximize their retirement savings and achieve tax-free growth and withdrawals. However, it’s crucial to understand the requirements, potential drawbacks, and your individual financial situation before deciding if this strategy is right for you. Consulting with a financial advisor can provide valuable guidance and help you make informed decisions about your retirement planning.
How Does a Mega Backdoor Roth Work?
With a massive backdoor Roth, you can convert up to $43,500 from a regular 401(k) to a Roth IRA or a Roth 401(k) in 2023 without having to pay any taxes. In 2024, that rollover cap would be $46,500. Those annual caps could be reduced by employer contributions. We’ll get to that lower in this report.
Overall, keep in mind that this approach only makes sense if you still have a sizable amount of money you’d like to transfer into a Roth IRA after you’ve already maxed out your yearly contributions to 401(k)s and IRAs.
You also need to be enrolled in a traditional 401(k) plan offered by your employer, which allows after-tax contributions. Additionally, it must permit i-plan Roth rollovers, which function similarly to Roth conversions inside a plan, or in-service withdrawals.
• After-tax contributions. Certain plans permit you to make additional after-tax contributions after you have reached your annual maximum for employee 401(k) contributions. As the name implies, those contributions are made up of previously taxed funds. The same applies to Roth contributions; however, while Roth earnings are tax-free upon withdrawal, earnings from after-tax contributions are taxable.
• In-service withdrawals. While they are still employed, participants in the majority of 401(k) plans, but not all of them, allow withdrawals from their accounts. The massive backdoor Roth process requires those in-service withdrawals. After making after-tax contributions, you must take an instant in-service withdrawal before the contributions produce returns that would be subject to taxes upon rollover. You can still do a massive backdoor Roth after quitting your current job if your plan does not allow in-service withdrawals, but you will likely have to pay taxes on any investment gains during a rollover.
Utilizing a solo 401(k) plan and being self-employed could put you ahead of the game. Not all of the top solo 401(k) providers automatically permit after-tax contributions and withdrawals while still in service. However, if yours doesn’t, you might be able to reasonably quickly and cheaply alter your plan to accommodate those
Backdoor Roth IRA Basics
Your income cannot be used to make direct contributions to a Roth IRA if it exceeds the thresholds shown in the table above. On the other hand, high earners can transfer money from a traditional 401(k) or traditional IRA into a Roth IRA through a backdoor Roth IRA conversion.
Let’s simplify a somewhat detailed process. First, get your money into a traditional IRA. To accomplish that, you can either roll over funds from a traditional 401(k) account into a traditional IRA or make direct contributions to one. Then you convert the traditional IRA to a Roth IRA.
When money is rolled into a Roth account that hasn’t been taxed yet, you usually have to pay income taxes on it. Because of this, you should roll over your money as soon as possible after depositing it into a traditional account in order to reduce any potential gains—which would also be subject to taxes.
There are no limitations on who can convert a Roth IRA based on income. The IRS annual contribution limitations for traditional IRA contributions must be adhered to in the year that the contributions are made. However, you can circumvent these limitations by rolling over money from your employer-sponsored retirement plans, which have significantly higher contribution caps.
Mega Backdoor Roth: What It Is and How It Works
FAQ
What is the 401k limit for Super Roth?
Is a Roth IRA the same as super?
What is a mega Roth?
What is the Roth 401k limit?
What is a Super Roth IRA?
What is a super Roth? What is a super Roth? A Roth IRA is a special retirement account where you pay taxes on money going into your account and then all future withdrawals are tax free. Most investors should have at least a Roth IRA – or even better, the “Super-Roth” (explained below) as part of their overall retirement planning strategy.
What is a Roth IRA and how does it work?
A Roth IRA is a special retirement account where you pay taxes on money going into your account and then all future withdrawals are tax free. Most investors should have at least a Roth IRA – or even better, the “Super-Roth” (explained below) as part of their overall retirement planning strategy. What is a super Roth 401k?
What is a mega backdoor Roth 401(k)?
A mega backdoor Roth takes it to the next level. It’s for people who have a 401 (k) plan at work. They can put up to $46,000 of post-tax dollars in 2024 into their 401 (k) plan and then roll it into a mega backdoor Roth, which is either a Roth IRA or Roth 401 (k).
Can a Roth 401(k) be a mega IRA?
If you have a Roth 401 (k) at work (and the plan allows for the mega option as described below), generally you can choose whether the final destination of your mega contributions is the Roth 401 (k) or a Roth IRA. If your employer offers only a traditional 401 (k), then your mega contributions would end up in a Roth IRA.