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MEGA Backdoor Roth IRA Strategy

The Mega Backdoor Roth IRA Strategy is a way for an individual to contribute large amounts of money into a Roth IRA by utilizing the “After Tax Contribution” bucket in their employer 401(k) plan.

For most people, the maximum annual amount they can contribute to a Roth IRA is $6,000, either by directly contributing (if they meet income limits) or by utilizing a Backdoor Roth strategy (for high earners).

While the Backdoor Roth strategy seeks to avoid income limits and get up to $6,000 / year into a Roth IRA, the Mega Backdoor Roth strategy seeks to get up to $37,500 / year into a Roth IRA.

To complete a Mega Backdoor Roth, an individual needs to be eligible for a company sponsored 401(k) plan that permits BOTH of the following:

1. After-Tax contributions

2. In-service distributions to a Roth IRA

The strategy involves first making an After-Tax contribution to the 401(k) plan, then making an in-service distribution to a Roth IRA.

Because the (2020) annual IRS total contribution limit to a 401(k) is $57,000, an individual could make the maximum individual contribution of $19,500 and additionally make an After-Tax contribution of an additional $37,500. If the company matches or contributes to the Plan, that amount would be reduced from the $57,000.

Some individuals choose to utilize Self Directed Roth IRAs, which often provide the ability to invest in certain alternative assets like real estate, private loans and hedge funds.

For more detail on this strategy, download the PDF below.

 

(Approval code: BF1/BFA0048)

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