The MEGA Backdoor Roth

The MEGA Backdoor Roth

The Mega Backdoor Roth IRA Contribution Never heard of a Backdoor Roth IRA? Click here to review our Backdoor Roth IRA guide before reading on. Why Would I Want To Do A MEGA Backdoor Roth Strategy?

1.You want to reduce your taxable income in retirement.

2.You are already maxing out your standard 401(k) savings plan.

3.You desire to make working at the dealership optional as quickly as possible.

What the heck is MEGA Backdoor Roth Strategy?

A Mega Backdoor Roth IRA contribution is an advanced retirement savings strategy that allows top performers from the sales floor to F&I and up to GMs to contribute additional funds to a Roth IRA beyond the regular contribution limits. In 2023 a Mega Backdoor Roth IRA would allow an individual to save a maximum of $66,000 or $73,500 if over 50 in their 401k!

For comparison, the 2023 401(k) standard contribution limit is only $22,500 or $30,000 if over 50.

That’s an additional available maximum of $43,500!

As I said, this strategy is for top performers who want to quickly reach the point when he or she is going to the dealership...

…because he wants to, not because he has to.

Here’s how it works:

1.Employer-sponsored 401(k) plan requirements:1.You need access to an employer-sponsored 401(k) plan

2.The plan must have a Roth option.

3.The plan allows after-tax contributions.

*Not all plans offer this feature, so you must check with your plan administrator to confirm.

2.Understand your standard contribution limits. In 2023, traditional IRAs and Roth IRAs allowcontributions of $6,500 and $7,500 for those over 50 and earn under specific income limits.Standard 401(k) contributions for 2023 are $22,500 and $30,000 for those over 50.

3.Max-out standard contribution Limits.

4.Calculate how much you may contribute beyond the standard limits. Subtract your annualmaximum of $22,500 or $30,000 PLUS any employer-matching contributions from $66,000. Thisnumber equals the total max. additional amount you can contribute.

5.Final Destination of Funds. Assuming all of the above has occurred, some employer planswill allow you to distribute your Roth 401(k) funds into your individually owned (vs. employer-sponsored) Roth IRA.

$66,000 is 10x (MEGA) the standard annual Roth IRA contribution limit of $6,500

Consider tax implications: Understanding the tax implications associated with a Mega Backdoor Roth IRA contribution is essential. While the after-tax contributions have already been taxed, any pre-tax earnings or gains on those contributions will be subject to taxes at the time of conversion.

When executed correctly, you should be able to limit any potential pre-tax earnings involved in this strategy. Consulting with a tax professional to fully comprehend the tax consequences based on your specific circumstances is strongly advisable.

At RB Wealth for Automotive Sales Professionals, we believe it is essential for financial planners, CFPs®, and CPAs to have regular open communications for the benefit of their clients.

It's worth noting that the rules and specifics of Mega Backdoor Roth IRA contributions can vary depending on the employer's 401(k) plan and any plan-specific restrictions. Therefore, it's crucial to review your plan documents, consult with your plan administrator, and seek guidance from a financial advisor or tax professional to ensure compliance with applicable regulations and maximize the benefits of this strategy.

EXAMPLE:

If an individual who maxes out their standard pre-tax contribution at $22,500, making $300,000 per year with a 4% employer-sponsored match ($12,000 match), would contribute a total of $34,500. Meaning this individual would be eligible to contribute an additional $21,500 in after-tax contributions and then convert these funds the Roth 401(k) bucket within the plan or an individual Roth IRA owned outside of the plan.

*Assuming all requirements mentioned above are satisfied.

Summary Notes:

• •You’ve got extra money to save after your monthly bonus rolls in.

• •You are already maxing out your standard contribution limits.

• •Your employer-sponsored plan allows for Roth contributions.

• •Your employer-sponsored plan allows you to move after-tax contributions.

-Rob, The Car Salesmen’s CFP®

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Best Regards

ROBERT B. BACHARACH, CFP®

The Car Salesmen's CFP®

Founder & President, Automotive Wealth

704-727-7129www.automotive-wealth.com 17810 Statesville Rd Suite 322

Cornelius, NC 28031

Disclaimers

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through IHT Wealth Management, a registered investment advisor. IHT Wealth Management and RB Wealth Partners are separate entities from LPL Financial.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion.

These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.