Can I make a MEGA backdoor Roth contribution?
We can provide you with the steps to consider when deciding whether a Mega Backdoor Roth contribution is right for you. Here are some factors to consider:
Does your 401(k) plan allow after-tax contributions? The first step is to check whether your 401(k) plan allows after-tax contributions. If the plan doesn't allow for after-tax contributions, then a Mega Backdoor Roth contribution is not possible.
What is the maximum amount you can contribute? If the plan allows after-tax contributions, then the next step is to determine the maximum amount you can contribute. The IRS limits the total amount of contributions (employee and employer combined) to $58,000 for 2021 and $61,000 for 2022.
Is the plan subject to the ACP test? If the plan is subject to the ACP test, then your after-tax contributions may be limited by the test. The ACP test is a nondiscrimination test that ensures that highly compensated employees (HCEs) don't receive a disproportionate amount of benefits from the plan.
Does the plan allow in-service distributions or separate accounts? If the plan allows for in-service distributions or separate accounts, then you can roll over your after-tax contributions to a Roth IRA. If not, the Mega Backdoor Roth contribution may not be possible.
What are the tax implications of the rollover? When you roll over your after-tax contributions to a Roth IRA, you will owe taxes on any gains that have accrued on the contributions. It's important to consider the tax implications of the rollover before proceeding.
It's also important to note that the Mega Backdoor Roth contribution is a complex strategy that requires careful planning and execution. It's recommended to consult with a financial advisor or tax professional to determine whether it's right for your unique situation.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.