WARNING: This is an advanced financial planning strategy. Do not attempt this on your own. Please seek the assistance of a financial planner or tax advisor. It is for informational purposes only and should not be considered a recommendation.
So with that said, this is something new that’s popped up on my radar this year thanks to one of our favorite Financial Zen Members. (Thanks again, Brian!)
We dug deep on it in Financial Zen Live! last night and got some great engagement.
It’s called a Mega Backdoor Roth.
Here’s how it works.
You put after-tax money into your 401k, then you immediately roll it over into a Roth IRA.
Sounds simple, right? The devil’s in the details.
You can only do this if your 401k allows two things:
– After-tax contributions- In-service distributions (kinda like a 401k rollover, but while you’re still working there)
The maximum you can contribute from all sources to a 401k is $61,000 in 2022.
For instance:
Pre-tax employee contribution: $20,500
After-tax contribution: $40,500
Total 401k contribution: $61,000
If your employer matches, it reduces your after-tax contribution because you can’t go over $61,000.
Pre-tax employee contribution: $20,500
Employer match: $5,000
After-tax contribution: $35,500
Total 401k contribution: $61,000
There’s a lot more moving pieces than I’m laying out here.
You should look deeper into this if you are already…
1. Maxing out your pre-tax 401k contributions
2. Maxing out your HSA contributions
3. All other buckets have been filled (like college or a down payment)
4. Contributing after-tax money to a taxable brokerage account
Lastly, it’s possible this gets repealed in the Biden tax bill. The White House took it out, then put it in, then took it out again with a delay until 2029. The House took it out completely. Who knows what the Senate will do or where it will finally land. So watch this space.
