Doing something called a “Mega backdoor Roth conversion” is a great way to get more into your Roth savings. Here’s how to know if you qualify, and the steps to take to maximize your Roth savings:
If you are a married household that makes about $200k, or about $140k for single filers, you may think that your options for saving into Roth accounts are limited. However, depending on your 401(k), you may have the ability to save nearly $30,000 into Roth savings accounts each year!
First, you have to participate in a 401k plan at work. Not every 401(k) plan will offer this special options though. Your 401(k) plan must allow something special called after-tax contributions, which are contributions in excess of the $19,500 annual limit (for 2021).
If your plan allows this, the next feature to check for is if your 401(k) plan offers you the ability to convert those after-tax contributions to your Roth 401(k). Or, you may have the option to do an in-service rollover of ONLY the after-tax contributions into a non-deductible IRA and then perform a Roth conversion of that account. However, this may not be worthwhile if you have other assets in a traditional IRA.
If you have this option, you may be able to do mega backdoor Roth conversion, which involves making these after-tax contributions and then converting them to a Roth 401k or Roth IRA while paying no additional taxes.
There are a couple caveats though:
First, this is a lot of money. You can contribute up to about $30,000 this year in after-tax contributions (the exact amount can depend on the year and the annual IRS limits set each year, along with any profit sharing or company match amounts that go into your 401(k) account). You need to calculate your exact amount that you are eligible to contribute to ensure you don’t over contribute.
Also, ensure you take the right steps because this is a multi-step process. Usually, you will have to contribute the full annual tax-deductible contribution limit first. Then, any additional contributions will begin to show up in your account as “after-tax” contributions.
Then, find out the timing of doing the conversion. This will depend on your 401
The reason is to get a lot more money into your Roth savings than you’d otherwise be able to do. Or, this can be a great way for those with income over the IRS limits for Roth contributions to be able to get money into a Roth account.
Depending on your current tax rate and projected tax rate during retirement, we find that Roth savings are usually the most valuable for retirees. So, maximizing the amount that you can save into Roth retirement accounts is important.
Consider reaching out to us if you have questions about the strategy, or if you think you might qualify because this can be a great way to increase your savings in the future.