Q. How to put away maximum possible amount in my retirement account?
A. Below is a mega-backdoor Roth conversion strategy for you, if you note the following caveats:
Here are the steps to implement the strategy (with the help of an advisor):
1. Client maxes out annual contributions to all tax-qualified plans, including 401(k).
Pro tip 1: Don’t forget the HSA!
2. Client makes a nondeductible, non-Roth contribution to 401(k), up to the permissible annual limit.
Pro tip 2: Use of the 401(k) avoids the IRS aggregation rule.
Pro tip 3: When possible, advise self-employed clients to design their 401(k) plans to permit non-Roth employee contributions.
3. Client rolls over the non-Roth contribution from the 401(k) into a Roth IRA account.
Pro tip 4: Take care to avoid language that indicates the client’s intention to circumvent the limits on Roth contributions.
Pro tip 5: It’s smart to allow some time to elapse before the rollover. Just remember that any accrued earnings before the rollover will be taxed upon withdrawal.
When implemented properly, the mega-backdoor Roth strategy can help you set aside tens of thousands of extra dollars each year. These assets will accumulate tax-free and provide nontaxable income in retirement.
For more detailed description, please see the article published in Financial Planning magazine.
A. Below is a mega-backdoor Roth conversion strategy for you, if you note the following caveats:
- This strategy only works for individuals with significant resources and income who have already maxed out contributions to their other retirement accounts.
- Your 401(k) plan must allow for non-Roth, after-tax contributions to the plan.
- You need to carry out the strategy in a way that avoids the IRS aggregation rule and prohibition on step transactions.
Here are the steps to implement the strategy (with the help of an advisor):
1. Client maxes out annual contributions to all tax-qualified plans, including 401(k).
Pro tip 1: Don’t forget the HSA!
2. Client makes a nondeductible, non-Roth contribution to 401(k), up to the permissible annual limit.
Pro tip 2: Use of the 401(k) avoids the IRS aggregation rule.
Pro tip 3: When possible, advise self-employed clients to design their 401(k) plans to permit non-Roth employee contributions.
3. Client rolls over the non-Roth contribution from the 401(k) into a Roth IRA account.
Pro tip 4: Take care to avoid language that indicates the client’s intention to circumvent the limits on Roth contributions.
Pro tip 5: It’s smart to allow some time to elapse before the rollover. Just remember that any accrued earnings before the rollover will be taxed upon withdrawal.
When implemented properly, the mega-backdoor Roth strategy can help you set aside tens of thousands of extra dollars each year. These assets will accumulate tax-free and provide nontaxable income in retirement.
For more detailed description, please see the article published in Financial Planning magazine.
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