What is a mega backdoor Roth? Today we are going to break down a savings strategy most people don’t know about.

If you’re a high-income earner who easily maxes out their 401(k) each year, stay tuned.

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Show notes:

• Mega Backdoor Roth: What It Is and Who Should Consider the Strategy

Full transcript:

SPEAKERS

Anthony Saffer 0:00
Today we’re gonna break down the savings strategy that most people don’t know about. If you’re a high income earner, easily maxing out their 401k. Stay tuned.

Anthony Saffer 0:19
Okay, Alex so the maximum contribution an employee can make under 50 is is $19,500. If someone’s over 50, they can contribute an additional $6,500. But we want to talk about an additional strategy to that.

Alex Okugawa 0:32
Exactly, so those total amounts, I mean, that is a lot of money. But for some high income earners, that’s not enough. And so what we’re talking about is a strategy called a “Mega Backdoor Roth”. Now, in order to take advantage of this, your 401k plan needs to have two very specific provisions and not all 401k plans have this, you need to be able to make after tax non Roth contributions. And you also need to be able to make in service non hardship withdrawals. Together those two provisions allow you as a 401k participant to take advantage of the Mega Backdoor Roth strategy. And a lot of people ask, well, where can I find that information? Right? How do I know if my 401k plan allows us and most often, this can be found in like your summary plan description, if you ask HR or your work, they’ll be able to provide you with a summary plan description. And that’s where you can find that information.

Anthony Saffer 1:34
So find the summary plan description, can you do after tax? And can you take in service withdrawals. You need to have both of those features to be able to do that.

Alex Okugawa 1:43
Now in short, what you’re doing with this strategy is you’re like super funding a Roth IRA. And to take a step back again, the whole advantage of a Roth IRA is that you don’t get a tax break immediately or in the current year. But growth within a Roth IRA is tax deferred. And eventually when you take withdrawals out and retirement qualified withdrawals are tax free. So that’s a really big benefit to folks heading into retirement, but also those who are already maxing out their 401k with just a normal, traditional or Roth contributions.

Anthony Saffer 2:15
And if we do end up in an increasing tax environment later on where tax rates are higher, this could be even a bigger benefit.

Alex Okugawa 2:22
Exactly. So what are some things we should know about this strategy before people just dive on and say,I’m gonna start using it?

Anthony Saffer 2:27
Yeah. And you wrote a really good post on this, which we’re going to post too, as well. But when somebody is considering this, they need to be thinking about. Okay, do I have a cash reserve? Am I putting contributions toward a health savings account? Maybe? Yeah. Are they? Or do I need to invest for more intermediate needs, instead.

Alex Okugawa 2:44
I probably should pay off high interest rate debt that I should pay off first. So it’s kind of like getting your financial house in order first, before considering these more advanced high saving strategies.

Anthony Saffer 2:55
So this is really more for long term money, but I do want to put it away in a tax advantaged environment. So like you said, You’ve created a really good post on that. We’re going to link to that if you’d like to read more. Alex did a nice job on that on that post. So these are the types of things that we help people with high income earners, professionals that want to set aside more money in a tax wise way. These are the types of strategies that we can help with. If you’d like to talk with us more go to onedegreeadvisors.com you can schedule a quick call with us. We would love to talk with you.

 

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