Image Source: (Investopidia)
By Eli Richardson
September 26, 2021
A little-known tax method to boost retirement account savings has gained traction in recent years. This tax strategy is called the mega-backdoor Roth conversion, and it has enabled many Americans to accumulate high balances in tax-free Roth accounts.
New legislation has been approved by the House Ways and Means Committee that would prohibit mega-backdoor Roth conversions.
So, what is a mega-backdoor Roth conversion? This is a strategy that allows participants in 401(k) plans that allow after-tax contributions to put in as much as $58,000 /yr into their 401(k) account and convert a sizable amount into a Roth account. If executed correctly the conversion can have a small tax hit and the money can grow tax-free in their Roth account.
This strategy relies on the amount that the IRS allows employees to contribute to their 401(k) account: $58,000/yr below 50 years old and as much as $64,500 above 50 years old. These figures hinge on if the plan allows an individual can contribute $38,500 in after-tax money on top of the contribution limit to traditional pretax 401(k) or Roth401(k) of $19,500 or $26,000 if older than 50 (Wall Street Journal).
By implementing this strategy individuals can significantly increase the amount they put in yearly to their Roth account, over the $6,000 contribution limit on a Roth IRA and $19,500 limit for Roth401(k)s.
In addition to prohibiting mega-backdoor Roth conversions, this new legislation would also prohibit Roth conversions of after-tax contributions to IRAs and require individuals with total retirement account balances over $10 million to take minimum distributions. These new rules would come into place on January 1st, 2022.
Source: (Wall Street Journal)