If the concept of a Roth IRA appeals to you, you will like the supersized version, referred to as mega backdoor Roth IRA. If lady luck is on your side, using this technique may make it possible for you to deposit an additional $40,500 into Roth 401(k) or Roth IRA in 2022, after which you could roll that money into mega backdoor Roth.
It is for those who have a 401(k) plan at work; in 2022, they will be able to deposit up to $40,500 of post-tax cash into their 401(k) plan and then roll it over into mega backdoor Roth, that is either a Roth IRA or Roth 401(k). Warning: Creating mega backdoor Roth is a sophisticated process with more moving components and the possibility of being struck with unanticipated tax costs; thus, before doing this at home, it is recommended that you speak with a financial adviser or tax professional.
The mega backdoor Roth enables you to contribute up to $61,000 to your 401(k) plan for the 2022 tax year. What does all of this add up to? You may contribute an extra $40,500 of after-tax money into your 401(k) account in 2022, provided that you don't receive an employer match on those dollars.
The standard 401(k) contribution for 2022 is $20,500, and you can put those dollars in. If you obtain a match from your workplace, you will need to reduce the money contributed by your company from the $45,500 total. For illustration's sake, let's pretend that you earn $250,000 annually and that your company matches 3% of your contribution. After considering the $7,500 match amount (equal to $250,000 multiplied by 0.03) and the $40,500 limit, you would only be able to contribute an extra $33,000 in after-tax money.
The mega backdoor Roth permits you to roll over the after-tax cash that you deposit into a Roth IRA, where things start to get interesting for you. Suppose your employer offers a Roth 401(k) plan, and the plan permits the mega option (which will be explained in more detail below). In that case, you will typically be able to decide whether the Roth 401(k) or a Roth IRA would serve as the ultimate recipient of your mega contributions.
If your workplace only provides a regular 401(k), then your employer matches contributions to a Roth IRA instead of your mega contributions. The following is a brief rundown of the components that should be in place for the optimal implementation of the mega backdoor Roth strategy:
Your pre-tax contributions to your standard 401(k) and your after-tax contributions to your Roth 401(k) go into their distinct pots of money. For illustration purposes, let's imagine that in 2022 you earned $200,000 per year and contributed the maximum allowable amount before taxes, which was $20,500. In addition, your company contributed to the plan by matching 6% of your pay, bringing the total amount to $24,000. Your total pre-tax contribution for year come to $32,500 after considering this. Because the maximum allowable contribution is $61,000, you can contribute an extra $28,500 post-tax cash.
You may move money from the pre-tax area of your plan into the Roth 401(k) section of your plan, or you can transfer money out of the 401(k) plan and put it into a Roth IRA while the company still employs you. Contact your company's human resources or the plan's administrator if you need clarification.
Even after contributing the maximum allowed to your traditional 401(k) and Roth IRA, you still have money to put away in savings.
The answer to this question is quite cut and dried: Either your workplace plan accepts contributions made after taxes, or it does not. If it does, this is how to determine the maximum amount that you are permitted to contribute to the component of the plan that is deducted after taxes:
If your 401(k) plan allows for after-tax contributions, the maximum amount you and your employer can put into your 401(k) in 2022 is $61,000, or $67,500 if you are 50 or older. If your plan does not allow for after-tax contributions, the maximum amount is $19,000. For illustration purposes, let's imagine that in 2022 you earned $200,000 per year and contributed the maximum allowable amount before taxes, which was $20,500. In addition, your company contributed to the plan by matching 6% of your pay, bringing the total amount to $24,000. Your total pre-tax contributions for that year come to $26,500 after considering this. You still have the opportunity to contribute an extra $34,500 in post-tax earnings, even though the maximum allowable amount is $61,000.
