Mega Backdoor Roth is the best loophole for tax-free growth and withdrawal.
But 99% of people have no clue how it works.
Here is all you need to know about it:
Roth accounts have limits. For example, Roth IRA is capped at $7,000 per year or 401k is at $23,000 per year.
But what if you wanted to contribute significantly more?
Mega Backdoor Roth is a unique strategy that allows funding Roth accounts far in excess of normal limits.
You can contribute $30,000+ to Roth accounts with this loophole...
It’s a pretty simple 2 step process:
1. Contribute to a 401k after-tax account
2. Roll the funds over to the Roth IRA or Roth 401k
But there is a caveat..
This strategy is only available through the employer’s 401k, so you need to ask whether your plan allows it.
Here is the email I personally sent to my 401k plan asking whether it’s available:
Unfortunately, if your employer doesn’t allow it, this strategy wouldn’t be available.
The rules will usually vary from plan to plan, so it’s also important to check your Summary Plan Description.
The total limit to contribute to the employer plan is $69,000 in 2024.
So if you are contributing $23,000 to the 401k, receiving a $5,000 match, you can contribute $41,000 extra to the Roth account!
Roth 401k – minimize taxable earnings by automatic conversion and might be easier to set up
Roth IRA – greater variety of investments and can withdraw contributions penalty free at any time.
In my opinion, rolling into a Roth IRA is a better option.
When you contribute to after-tax (step 1), the amount is automatically invested. Then, when you roll the balance into a Roth IRA (step 2), you might have some earnings. These earnings are taxable income.
To reduce earnings, do steps 1 and 2 as soon as possible.
@money_cruncher
I called
@Vanguard_Group
and the rep at the time said this was not an option. Anyone get a different answer? I’m skeptical of some of their first line responses.
@money_cruncher
All people need to do is realise that every dollar they pay in taxes, is a dollar lost
start realising this, and your wealth will compound faster
@money_cruncher
For Self Employed folks who pay themselves through an S Corp, do you favor any TPAs that's help set a solo 401ks that will do this for you reliably?