Mega backdoor Roth conversions can be a 'no brainer' for higher earners, expert says
Mega backdoor Roth conversions can be a 'no brainer' for higher earners, expert says
Strategic Tax Planning for High Earners: Understanding Mega Backdoor Roth Conversions
Benefits of Roth IRAs
Roth IRAs offer tax-free growth and withdrawals, appealing to investors, but income limits restrict direct contributions for high earners.
Mega Backdoor Roth Conversions
This strategy allows high earners to bypass Roth IRA income limits by converting after-tax 401(k) contributions into a Roth account, facilitating tax-free growth.
Plan Restrictions and Rules
Not all 401(k) plans permit mega backdoor conversions, and it's crucial for individuals to review their plan's features and restrictions before proceeding.
Tax Implications on Growth
While Roth conversions grow tax-free, after-tax 401(k) contributions are only tax-deferred, necessitating careful planning to minimize taxes on growth during conversion.
What are the adjusted gross income limits for Roth IRA contributions for single filers and married couples filing jointly in 2024?
The adjusted gross income limits for Roth IRA contributions in 2024 are $161,000 for single filers and $240,000 for married couples filing jointly.
How do mega backdoor Roth conversions allow higher earners to bypass Roth IRA income limits?
Mega backdoor Roth conversions allow higher earners to bypass Roth IRA income limits by utilizing their workplace 401(k) plans. This strategy involves making after-tax contributions to the 401(k) and then converting those contributions to a Roth account, either a Roth IRA or Roth 401(k).
First, the investor maxes out their pretax 401(k) contributions. For 2024, the pretax or Roth 401(k) deferral limit is $23,000, with an additional $7,500 for savers aged 50 and older.
Once the pretax contributions are maximized, the investor can make after-tax 401(k) contributions above the yearly deferral limits. Some employees can transfer these funds to a Roth account to kickstart tax-free growth. The maximum 401(k) limit for 2024 is $69,000, which includes deferrals, employer matches, profit sharing, and other deposits.
By converting after-tax funds to a Roth account regularly, investors can minimize upfront taxes on the conversion and potentially avoid taxation on all growth. This strategy effectively bypasses the income limits associated with direct contributions to a Roth IRA. However, it's essential to review the specific rules and restrictions of the 401(k) plan, as not all plans allow this strategy.