Mega backdoor Roth conversions are being recommended by financial specialists, especially for high-income earners. These conversions turn after-tax 401(k) contributions into thus boosting retirement savings significantly. Up to $58,000 can be contributed in 2021, compared to the standard Roth IRA limit of $6,000. The growth on Roth accounts is also tax-free, but there are tax implications and regulations to understand.
Conversions are attractive to people with high earnings as they offer a way to bypass limitations on direct contributions due to income restrictions. This means that high-earning individuals are able to increase their contributions significantly. However, as conversions come with their own set of rules and requirements, thorough knowledge is required before investing.
It’s essential to take into account your current financial situation and long-term financial objectives when considering this strategy. A carefully weighed decision is recommended. Ideally, advice from an experienced financial advisor should be sought to understand all the implications, benefits, and drawbacks.
According to projections, the income limits for Roth IRA contributions in 2024 will be set at $161,000 for single filers and $240,000 for couples.
Boosting retirement savings with mega backdoor Roth
However, high earners can bypass these limits through conversions and enjoy significant tax savings. The flexibility of converting traditional IRA funds into Roth IRA funds offers tax-deferred growth and tax-free withdrawals. But be warned: this strategy can trigger a tax bill in the year the conversion is made.
Financial experts underline that the Roth conversion makes sense for high earners who have used up all other tax-favored options. Particularly beneficial for people willing to pay taxes upfront for a potentially tax-free income in retirement, this strategy helps achieve long-term tax efficiency. However, it’s important to consult a financial advisor to fully understand all potential benefits and drawbacks.
With the cap on pre-tax or Roth contributions expected to reach $23,000 by 2024, and $30,500 for those 50 or older, some workers can escape these limits by switching funds into a Roth account for tax-free growth. It’s worth mentioning that there are restrictions on what is considered “matching” contributions by employers, with the IRS predicting the limit at about $41,000 per year in 2024. Meanwhile, the profit-sharing contribution limit is expected to be around $61,000 or 100% of the employee’s compensation.
Audit your retirement savings plan regularly to ensure that you’re maximizing your benefits and complying with federal guidelines. Consulting with a financial advisor or tax professional for advice is always recommended.
