What is the Mega Backdoor Roth Strategy?
In this section, we will review the basics of the Mega Backdoor Roth strategy and discuss the requirements for utilizing this strategy. You will understand how to save a large amount of tax-free money and why it may appeal to self-employed individuals.
How to Make Mega Contributions to a Roth
To make mega contributions to a Roth, you need a retirement plan funded by your employer that allows for after-tax contributions. For example, earnings after-tax that are deducted from your paycheck into a 401(k) or 403(b) retirement plan may provide this option.
Why Employers May Not Allow the Strategy
If your employer allows you to make mega contributions to a Roth, you are lucky. Some employers may not be aware of this strategy, or they may be unwilling to implement after-tax contributions due to regulations concerning retirement plans.
Self-Employed Individuals
If you are self-employed with no other employees, you may be an excellent candidate for this strategy. You do not have other employees who could trigger testing issues, so you can usually establish a Mega Roth account. However, you typically cannot use the strategy with existing and ready-made individual 401(k) plans. Instead, you likely need to use a service provider like a Third-Party Administrator (TPA) to provide a plan document that accommodates the strategy and assists with conversions and reporting.
Source: https://www.thebalancemoney.com/how-mega-backdoor-roth-contributions-work-5189976
Leave a Reply