This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. If the highest paid workers are saving at a much higher rate than other workers, the plan may be forced to return some of that money. Two months free with promo code "nerdwallet". This may influence which products we write about and where and how the product appears on a page. A mega backdoor Roth IRA is a strategy that allows people who have already maxed out their individual 401 (k), IRA, and other tax-advantaged account contributions for the year to put in more money into a … If you’ve maxed out your 401(k) and a Roth IRA and you still have money to save this year, that’s when you’d consider a mega backdoor Roth. The individual may contribute to the Traditional IRA the maximum amount allowed $6,000 … Most retirement accounts require withdrawals in retirement to be taxed as ordinary income. When evaluating offers, please review the financial institution’s Terms and Conditions. That's because IRS nondiscrimination tests require that retirement plans don't offer a substantially bigger benefit to high-income employees than rank-and-file workers. If fortune smiles on you, this strategy could allow you to stash an extra $37,500 into a Roth IRA or Roth 401(k) in 2020. However, this does not influence our evaluations. There are no income or contribution limits — that is, anyone can convert any amount of money from a traditional to a Roth IRA. More likely however is that I just skip the $5,500 backdoor Roth (which exposes me to the pro rata rule), and instead just do more and more of the mega-backdoor Roth. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. Roth IRAs allow withdrawals to be taken tax free. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly. Pro Rata Rule for Mega Backdoor Roth. If your employer offers only a traditional 401(k), then your mega contributions would end up in a Roth IRA. Only conversions from IRAs (including SEP and SIMPLEs as mentioned by @peds) to Roth IRAs are taxed under the pro-rata rule. Before we dive into Roth IRA conversion and the pro rata rule, you'll want to review how a Roth IRA differs from a Traditional IRA. Then, you’re almost immediately getting your money out of that bucket and into either a Roth IRA or Roth 401(k) before it starts accruing investment earnings. Backdoor Roth IRA: An Overview Money contributed to Roth accounts does not result in a tax deduction, unlike contributions to tax-deferred accounts. The caveat: Creating a mega backdoor Roth is complicated, with many moving parts and the potential to get hit with unexpected tax bills, so consult with a financial planner or tax pro before trying this at home. 529 Plans: The Ultimate College Savings Plan, Understanding And Using 529A ABLE Accounts, Using A Roth IRA To Save And Pay For College, Student Loan And Financial Aid Programs By State, The Guide To Military And VA Education Benefits, The Best College Scholarship Search Websites, Pell Grants: What They Are And How To Qualify, How To Use A 529 Plan If Your Child Doesn’t Go To College, How To Find The Best Student Loans And Rates, Best Student Loans To Pay For Graduate School, Best Student Loans To Pay For Medical School, Guide To Income Sharing Agreements (ISAs), Best Student Loan Refinancing Bonuses And Promotional Offers, Student Loan Forgiveness: 80+ Programs To Forgive Your Loans, The Full List Of Student Loan Forgiveness Programs By State, How To Start Investing In Your Twenties For 22 – 29 Year Olds, How To Start Investing In Your 30s For 30 – 39 Year Olds, The Best Traditional And Roth IRA Accounts, The Best Places To Open A Health Savings Account, 15 Best Side Hustles You Can Start Earning With Now, Side Hustle Ideas: 50+ Ways To Make Money Fast, 100+ Real And Honest Ways To Make Money In College, 80 Ways To Make Money From Home (In Your Pajamas), 5 Quick Money Making Ideas (That Take Less Than 1 Hour), 10 Interesting Ways You Can Make Money Driving, High-Paying Side Gigs That Earn $1,000 or More Per Month, Paid Surveys: Earn Money For Giving Your Opinion Online, 10 Crazy Ways To Make $10,000 You’ve Never Heard Of, 30 Passive Income Ideas You Can Use to Build Real Wealth, 3 Ways To Make $50,000 Per Year Without Working With Passive Income, How To Become A Real Estate Investor With Just $500, How to Create Streams of Passive Income on a Limited Budget, Residual Income: 7 Super Smart Ways to Build It, How To Become A Real Estate Mogul With Only $10,000, The Best Business Checking Accounts For Small Business. Pre-qualified offers are not binding. If you convert within the plan, the money is locked up until you reach 59-1/2, terminate employment, die, or become … Free career counseling plus loan discounts with qualifying deposit. If that’s the case, you might want to reconsider this strategy. Many or all of the products featured here are from our partners who compensate us. You could even call it mega. Mega-Backdoor Roth Even better, you can do a similar thing with your 401K, but on a much grander scale. But you risk a hefty tax bill on the rollover if you have pretax money — either contributions you’ve deducted or investment earnings — sitting in any traditional IRAs, thanks to the IRS’ pro-rata rule. Why would someone consider that? If you’re above the Roth IRA income limits, then a, If you’re under the income limits, you can contribute directly, If you’re over the income limits, you can get in with a. NerdWallet's ratings are determined by our editorial team. This doesn’t influence our evaluations or reviews. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities. What Is A 529 Plan and Where to Open One in Your State, How Much Should You Have In A 529 Plan By Age, How To Use A 529 Plan For Private Elementary And High School. What Is an Individual Retirement Account (IRA)? If you opt for the Roth 401(k), you contribute money that you’ve already paid taxes on. While the Backdoor Roth seems like a good way to invest into a Roth IRA even if you exceed the income limit, there are drawbacks. Like any retirement account, the Mega Backdoor Roth IRA has its benefits and … If your after-tax contributions accumulate investment earnings, the IRS has said it’s OK to split up that money, by rolling your after-tax contributions into a Roth IRA and the investment earnings into a traditional IRA. Her work has appeared in The Wall Street Journal and MarketWatch. A mega backdoor Roth takes it to the next level, as we describe below. What about this “mega backdoor” Roth IRA? Posted by 2 years ago. For example, let’s assume a 401(k) balance is $50,000 and includes $10,000 of after-tax funds. If you’re above the Roth IRA income limits, then a backdoor Roth — the non-mega kind — is also an option. Our partners cannot pay us to guarantee favorable reviews of their products or services. A mega backdoor Roth conversion is very different than the standard backdoor Roth IRA conversion. NerdWallet strives to keep its information accurate and up to date. 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