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  • Writer's pictureKevin Buckley, CEBS

Understanding the Mega Back Door Roth Strategy

Exploring an Advanced Retirement Savings Technique

The Mega Backdoor Roth strategy is a sophisticated method for high-income individuals to boost their retirement savings beyond the typical IRS limits. This strategy is particularly advantageous for business owners with solo 401(k) plans.

What's the Appeal?

Roth IRA and 401(k) accounts offer tax-free income in retirement, but their contribution limits may not be enough for high earners. The Mega Backdoor Roth strategy circumvents these limits, allowing contributions up to $66,000 or $73,500 for those catch-up eligible in 2023.

Key Requirements for a 401(k) Plan

To leverage this strategy, your 401(k) plan needs specific features:

  • After-tax Roth contributions, with tax-free principal withdrawal.

  • Voluntary contributions, distinct from Roth contributions and with different testing requirements.

  • A mechanism to convert these contributions to Roth, either within the plan or to a Roth IRA.

Why Solo 401(k)s are Ideal

Solo 401(k)s bypass certain nondiscrimination tests, making them perfect for business owners. This exemption means you can make voluntary contributions without the risk of contribution refunds.

Making a Mega Backdoor Roth Contribution

Here’s how you can make this strategy work:

  1. Contribute after-tax amounts up to $73,500 (including catch-up) in 2023.

  2. Allocate a portion to Roth contributions within the IRS 402(g) limit.

  3. Make the rest as voluntary contributions.

  4. Convert these to Roth, either within the plan or to a Roth IRA.

A Note on SECURE 2.0 Act

The SECURE 2.0 Act introduced Roth characterizations for certain 401(k) contributions. While this could simplify the process in the future, unanswered administrative questions currently make its immediate adoption risky.

Should You Consider It?

If you’re a high-income individual or business owner, the Mega Backdoor Roth strategy offers a substantial way to enhance your tax-free retirement income. It's worth considering, especially if you can afford it and have access to a plan with the necessary features.

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