Congress is paying a lot of attention to the mega backdoor Roth, thrusting it into the limelight of the financial world. Would it be a good fit for your situation?

If you meet the mega backdoor Roth’s requirements, it could be a smart tax move to implement into your retirement plan.

What’s happening:

Mega backdoor Roths are in the spotlight since Congress began threatening to eliminate them earlier in 2021. They say the relatively new retirement strategy is a way for wealthy individuals to avoid paying their fair share of taxes.

• So what? The threats weren’t empty. Congress recently introduced legislation that would kill the mega backdoor Roth and rollover Roth strategies by the end of 2021 if passed.

Roth Refresher: With Roth IRAs and Roth 401(k)s, you put money into a bucket of investments managed by financial professionals after paying income tax on it, and then those dollars grow tax-free.

It allows you to pay lower taxes on your money upfront rather than potentially higher taxes when you withdraw your money later.

• Roth IRAs and Roth 401(k)s are potentially an excellent option for anyone in lower tax brackets who expect to be in higher tax brackets later in life. They are also a great options for anyone looking for a tax-free income source during retirement and is a popular retirement planning tool among our clients.

They said it: “Roth accounts are a powerful tool for people who want to retire early.”

– Ben Abitz,Matt Logan Inc. Financial Planner

But, there is a cap on how much money you can contribute (re: add) to your Roth IRA and Roth 401(k)s because the government is all about limiting tax savings. These are called contribution limits, and they are recalculated each year.

• In 2021, the Roth contribution limit is $6,000 ($7,000 if age 50 or older).

Mega Backdoor Big Picture: Mega backdoor Roths legally work around the typical notion of contribution limits. Many people get the idea if they make too much money, they won’t qualify for a Roth plan and end up missing the benefits. The mega backdoor Roth offers an option for high earners currently maxing out their retirement accounts to stash away even more after-tax dollars.

For dummies: The dollars are taxed on the front end when you earn them. The money grows in the Roth account free of taxes and you aren’t taxed when you take the money out of the account in retirement.

How? The mega backdoor Roth essentially loosens the leash on contribution limits. People who qualify are allowed to put up $38,500 into their Roth IRA and Roth 401(k).

“If your retirement plan allows for a mega backdoor Roth and you’ve got adequate cashflow to contribute the maximum amount, it’s a no-brainer.”

– Ben Abitz, Matt Logan Inc. Financial Planner

Do you check the boxes

Questions to ask:

1. Do I have a 410(k) that allows after-tax contributions?

The answer is straightforward. Either your employer does or it doesn’t.

With your 401(k) you’ll need to determine the amount your employer can match.

You will have to add up what you and your employer have already contributed so far, and then estimate what could be contributed for the rest of the year.

Sound complicated? Don’t do it alone! Contact [email protected] and we can help see if you meet the mega backdoor Roth requirements.

2. Does my current Roth plan allow for in-service withdrawals to a Roth IRA or rollovers to a Roth 401(k)?

If not, you may want to rethink this strategy. The ideal mega backdoor Roth involves dropping your after-tax savings into the after-tax bucket once you max out your 401(k) contribution limit.

In English, please: If you can’t keep your money from being taxed when you move it to the mega backdoor Roth, it defeats the point. Most people generally want the money they put into their Roth to grow tax-free and for the taxes to be deferred (re: kicked down the road) to when you take the money out during retirement.

3. Do you have a traditional IRA?

This is one people get in trouble with because they don’t know the rule. To avoid being blindsided by an unwanted tax bill, your advisor needs to know about the makeup of your retirement plan. Traditional IRA dollars and after-tax 401(k) dollars are treated proportionately when you choose to fire up a mega backdoor Roth.

You may still have options, so digging deeper into your individual situation could keep the mega backdoor Roth on the table and the most amount of your money in your pockets.

4. Are you currently maxing out your retirement plan? Can you afford to max it out?

If you are unable to earmark these dollars for retirement and need them for everyday living expenses, a mega backdoor Roth would not be a good fit.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice

Some of the content provided by Matt Logan Inc. is produced by Oechsli, a non-affiliate of Cetera Advisor Networks LLC.

Matthew Logan CFP®, AIF®

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