Q. I know backdoor conversion is a way to contribute more to Roth IRA, can I contribute more to Roth IRA?
A. While backdoor Roth IRA conversion is an effective way, there is a bigger opportunity to boost your Roth IRA savings!
What's the bigger Roth IRA opportunity?Most people know that employees are generally allowed to contribute up to certain limits from their own pay each year, with the 2018 limit being $18,500. Employers can then provide additional contributions in the form of profit-sharing or an employer match. What usually flies under the radar is that some employer-sponsored plans let employees contribute additional amounts on an after-tax basis up to the total permissible contribution amount for both employees and employers. For 2018, that number is $55,000.
How this strategy works?
In order for the strategy to work, your employer's plan must -
The Caveats
The IRS allows taxpayers to separate out pre-tax and after-tax money, funding a Roth with the after-tax part without any tax impact. But unless you expect to leave your job soon, your 401(k) has to allow distributions while you're still employed, or else you won't be able to use the strategy effectively.
A. While backdoor Roth IRA conversion is an effective way, there is a bigger opportunity to boost your Roth IRA savings!
What's the bigger Roth IRA opportunity?Most people know that employees are generally allowed to contribute up to certain limits from their own pay each year, with the 2018 limit being $18,500. Employers can then provide additional contributions in the form of profit-sharing or an employer match. What usually flies under the radar is that some employer-sponsored plans let employees contribute additional amounts on an after-tax basis up to the total permissible contribution amount for both employees and employers. For 2018, that number is $55,000.
How this strategy works?
In order for the strategy to work, your employer's plan must -
- include provisions that allow it to accept after-tax contributions
- you're allowed to make in-service distributions from the plan, because the next step of the strategy is to roll over the after-tax portion of your 401(k) to a Roth IRA.
The Caveats
The IRS allows taxpayers to separate out pre-tax and after-tax money, funding a Roth with the after-tax part without any tax impact. But unless you expect to leave your job soon, your 401(k) has to allow distributions while you're still employed, or else you won't be able to use the strategy effectively.
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