Many of your clients might benefit from using a Roth IRA as part of their retirement savings strategy. But if you have clients who earn too much to contribute to a Roth IRA, you are likely familiar with the backdoor Roth strategy. For clients whose circumstances fit, you might also consider the mega backdoor Roth strategy as a way to funnel larger amounts into a Roth IRA account for them.
What It Is
A backdoor Roth IRA generally involves making an after-tax contribution to a traditional IRA account and then converting that amount to a Roth IRA. The taxation of the conversion will depend upon whether or not the client had additional funds in a traditional IRA account that were contributed on a pre-tax basis and/or that represent earnings on funds in the account.
A mega backdoor Roth involves your client making after-tax contributions over and above the annual 401(k) contribution limits to their employer’s 401(k) plan. This could amount to them being able to contribute up to an extra $37,500 per year. For high earning clients who can afford to do this, the mega back door Roth can be a way to funnel significant amounts to a Roth IRA account.
How It Works
In order for a mega backdoor Roth strategy to work, your client’s employer must allow after-tax non-Roth contributions to be made to the plan participant’s accounts. These contributions are made to a separate bucket over and above your client’s normal contributions to the plan.