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Mega Back Door ROTH. Take the Back Door ROTH to the Next Level Using Your Employer Sponsored Retirement Plan!

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Mega Back Door ROTH.  Take the Back Door ROTH to the Next Level Using Your Employer Sponsored Retirement Plan!

Mega Back Door ROTH.  Take the Back Door ROTH to the Next Level Using Your Employer Sponsored Retirement Plan!

You thought that the Back Door ROTH was a powerful ROTH funding strategy; what if you could use your employer sponsored plan to create a MEGA Back Door ROTH.  If your employer sponsored retirement plan offers after tax contributions, you have a huge ROTH funding opportunity.  First let’s revisit the benefits of the ROTH IRA and the funding restrictions.

  • Tax Free Withdrawals- If held for more than 5 years and age 59 ½ when withdrawn.
  • No Required Minimum Distributions (RMDs)- since there is no requirement to withdraw, there are no RMDs
  • No Age Limit- No requirement to stop contributing at 70 ½ as long as you have earned income
  • No Employer-Plan Restrictions- It is not tied to the amount that you contribute to other employer plans
  • Estate Planning Benefits- You can pass your ROTH IRA to your beneficiaries and they will receive tax-free withdrawals.  If you inherit a Roth IRA, you must take RMDs, but they're tax-free as long as the original account owner held the account for at least 5 years.

What Are the ROTH Funding Restrictions?

Contributors MUST have earned income, self-employed income or taxable alimony.

The contributor income must be below the applicable 2015 inflation adjusted Modified Adjusted Gross Income level as follows;

            Single, Head of Household    $116,000- $131,000

            Married Filing Joint                $183,000 - $193,000

            Married Filing Separate          $0- $10,000

Requirements of the Mega Back Door ROTH: 

  • Your employer sponsored retirement plan must allow after tax contributions.
  • The after tax contributions must pass the actual contribution percentage (ACP) test.
  • Your total contributions (pretax and after tax) must be below the overall limit for plan contributions ($53,000 for 2015).
  • You must have separate funds to make after tax contributions.
  • Your plan must allow periodic in-service distributions of after tax money and earnings.

So How Does The Mega Back Door ROTH Work?

Step One- Make After Tax Contribution to Your 401K- Your after tax contribution cannot exceed $53,000 in your 2015 401K.  As part of your overall tax planning, you will want to determine how much of your 401K contribution should be pretax, thereby reducing taxable income and how much should be designated as after tax contributions.

Step Two- Split the pretax and after tax contribution in preparation of a rollover/conversion distribution in Step 3.  IRS notice 2014-54 allows the separation of pretax and after tax distributions.  The pretax contributions would be rolled over into a self-directed IRA to continue the tax deferral.  The after-tax portion would be converted to a ROTH IRA as part of a tax free conversion. 

NOTE:  Distribution must be made on a pro-rata basis.

Step Three- Convert After Tax Contributions To A ROTH IRA- The after tax contributions would be converted to a ROTH in a tax free conversion.

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