The Roth IRA is an excellent retirement savings vehicle because it allows for tax-free earnings. Unfortunately, there is one disadvantage over the Traditional IRA: it requires you to have a MAGI of $203,000 or lower in order to contribute to a Roth IRA. For those ineligible to make a Roth IRA contribution but want to put away more for retirement, a mega backdoor contribution is a viable option. Read below to see if you are eligible to make one.
Have you made a maximum contribution of $19,000 ($25,000 if you are over age 50) to your 401(k) this year?
If you have not yet maxed out your 401(k), it is generally beneficial to do this first before considering a backdoor contribution. If you have already maxed out your 401(k) contribution, read on.
Will the 401(k) plan allow you to make non-Roth, after-tax contributions?
To answer this question, you will have to read your 401(k)’s Plan Summary Document. If the plan does not allow for these contributions, you will be ineligible to make a Mega Backdoor Roth IRA contribution. If your plan allows it, read on.
Is there room in the ACP test for you to make a contribution?
This question is complicated, and you will have to consult the plan sponsor to see if there is room for additional non-Roth contributions. If there is not, you will not be eligible for a backdoor contribution. If there is, you will be eligible, although there can be some loss of tax benefits.
Mega Backdoor Roth IRA Contributions are extremely complicated and take collaboration with the plan sponsor to complete. Check out this flowchart to learn more.
If you would like to schedule a call to talk about the best strategies for Mega Backdoor Roth IRA contributions or retirement planning in general, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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