![]() ![]() As noted, the amount allowed for these additional contributions is the balance remaining between contributions from all sources and that year's IRS maximum-allowed contributions and will depend on how employer matching and profit-sharing contributions work for the client's employer.įor example, if a taxpayer under age 50 earning $200,000 has an employer match of 5% and elects to contribute the maximum of $22,5, between her own contributions and her employer's, she would have a combined total of $32,500 contributed to her account. To use the mega-backdoor Roth strategy, clients need to know how big an after-tax contribution they can make. Calculating the maximum after-tax contribution For 2023, the maximum mega-backdoor Roth amount that can be contributed is $66,000 ($73,500 for age 50 and older), which is the IRS maximum allowed for all contribution sources. When the conversion is done as soon as administratively possible, the employee effectively excludes the growth of the after-tax dollars from taxation as well. The mega-backdoor Roth happens when an employee maximizes their after-tax deferral amount, then converts those dollars to Roth within their plan to add to their annual deferrals (or rolls them out while still participating), as described in more detail below. ![]() Essentially, after-tax contributions are a bit of a hybrid between pretax and Roth contributions. These additional deferrals are not taxable upon withdrawal, but any growth of the funds is taxed upon distribution. ![]() This third "bucket" allows workers to make up the difference between the total of their elective deferrals plus any employer contributions and the IRS maximum allowed contribution amount. A vast majority of plans also offer workers the option to designate their contributions as Roth.Ī third, less-available option for 401(k) and 403(b) accounts is making after-tax contributions above and beyond those designated as Roth. For the ultimate mega-backdoor Roth, the plan must also allow what are known as "after-tax contributions," defined next.Īll 401(k) and 403(b) plans allow employees to make pretax elective deferrals up to annual limits ($22,5, or $30,000 for those age 50 and older), which is the essence of these accounts.The plan also must allow participants to convert prior contributions to Roth inside the plan, as more than half of plans do, or it must allow participants to roll dollars out of the plan while still participating and.That plan must offer a Roth option for contributions.The client must be eligible to contribute to a Sec.To utilize a mega-backdoor Roth, the following circumstances must exist: This article discusses how the strategy works. The "mega-backdoor Roth" is a retirement savings strategy that technically allows individuals to make much larger contributions to certain workplace retirement accounts than the annual elective deferral limits. ![]()
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