MEGA Backdoor Roth IRA

Anything which starts with MEGA should garner your attention. MEGAstar. MEGAwatt. MEGAdeals. MEGAdeath (well that’s for my wife and any 80’s metal band fan). A MEGA Backdoor Roth IRA supercharges your tax-free bucket wealth bucket.

A MEGA Backdoor Roth is designed specifically for people who have a 401(k) or 403(b) plan at work. This type of Backdoor Roth allows contributions of up to $38,500 to a Roth IRA in 2021. This amount is in addition to the regular annual contribution limits the IRS allows for these types of accounts.

Executing a mega Backdoor Roth requires your employer-sponsored plan to allow the following:

  • After-tax contributions above the $19,500 pre-tax contributions limits set by the IRS
  • In-service distributions or withdrawals (non-hardship)

**ACTION STEP —> ask your HR department if in-service distribution or non-hardship withdrawals are permitted.

In the event your employer plan doesn’t allow for in-service withdrawals or distributions, a MEGA Backdoor Roth could be utilized upon termination of employment.

Benefits of a MEGA Backdoor Roth

There are four key benefits associated with a MEGA Backdoor Roth IRA.

  • You can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.
  • You can enjoy tax-free withdrawals in retirement. Do you think tax brackets will be higher or lower in retirement? By reducing your tax liability in retirement, your investment dollars go further.
  • A MEGA Backdoor Roth IRA allows sidestepping required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.
  • A Roth IRA is arguably the best way to transfer wealth. In the event you have (or will have) a larger legacy of wealth to pass on to future generations, this vehicle is the optimal way to pursue that goal.

Who is most suited for a MEGA Backdoor Roth? You may consider this move if you:

  • Have an eligible 401(k)/403(b) plan at work
  • Have maxed out traditional 401(k)/403(b) contributions
  • Are not eligible to contribute to a Roth IRA because of your income (although you may be able to fund an annual Backdoor Roth IRA).
  • Have additional money that you want to invest for retirement
  • Want to leverage the higher Roth IRA contribution limits allowed by a MEGA Backdoor rollover
  • Have interest in wealth/legacy transfer to heirs

There aren’t many options available to increase the amount in your tax-free bucket of wealth. Four of the more familiar options include a Roth IRA, a Backdoor Roth IRA, a Roth 401k/403b and properly structured life insurance. The goal in writing this article is to raise awareness regarding the incredible opportunity of the MEGA Backdoor Roth IRA and prompt taking action before this opportunity goes away.

In summary, if you are interested in growing your tax-free bucket of wealth and/or seamless transfer of wealth, it’s time to talk to your financial advisor to help you decide if a MEGA Backdoor Roth makes sense.

Hopefully you find this article to be MEGAhelpful.

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.

Converting from a traditional IRA to a Roth IRA is a taxable event.

If you’re considering working with us here at Mosaic, we invite you to learn more about who we serve and how we help them. You can also contact us with any questions you have.

By Anthony C. Williams, CWS, ChFC, MRFC, CLU | Investment Advisor Representative | President & Founding Partner of Mosaic Financial Associates & Orthopaedist Advisory Group | Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.