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Mega Backdoor Roth IRA Strategy Explained

Jul 8, 2024

Presentation: "Mega Backdoor Roth"

Speaker: Mark Ker, CPA, attorney, bestselling author, podcaster, radio host, YouTuber.

Introduction

  • Objective: Demonstrate how to exceed $1 million tax-free in a Roth IRA through the Mega Backdoor Roth strategy in 6-7 years.
  • Target Audience: People of all ages (30-60 years).

Key Ideas

What is a Roth IRA?

  • Features: After-tax contributions grow tax-free and withdrawals are also tax-free.
  • Example: Peter Thiel with $6 billion in a Roth IRA through startup and venture capital investments.

Rules and Myths

  • Myth: "I earn too much for a Roth IRA."
    • Fact: You can use the "backdoor" strategy to contribute to a Roth IRA.
  • Myth: "I’m too young/old for a Roth IRA."
    • Fact: Roth IRA is available to all ages if there is earned income.

Mega Backdoor Roth Strategy

Main Steps

  1. Open a Roth IRA (contribution limit of $6,500 in 2023).
  2. Use a Solo 401(k) (total limit of $66,000 in 2023).
  3. Use non-deductible contributions to a traditional IRA and convert them to a Roth IRA (using the "backdoor" strategy).

For Individuals Under 50

  • Roth IRA Contributions: $6,500.
  • 401(k) Contributions: $22,500 + $43,500 in "after-tax contributions".
  • Total: $72,500 annual contributions.

For Individuals Over 50

  • Roth IRA Contributions: $7,500.
  • 401(k) Contributions: $30,000 + $43,500 in "after-tax contributions".
  • Total: $81,000 annual contributions.
  • Important: Convert any traditional IRAs to Roth IRAs before beginning.

Questions and Answers

  1. Can I convert all my traditional IRAs at once?
    • Yes, but you can spread the process over several years.
  2. Do I need a W-2 salary to contribute to a Solo 401(k)?
    • Yes, for S corporations a W-2 is required.
  3. Have changes in the law affected the backdoor Roth?
    • No, current strategies remain effective. New laws might simplify some processes.
  4. Can I rollover current funds from an employer’s 401(k)?
    • Partially, it depends on the plan’s terms.

Conclusion

  • Benefits: The Mega Backdoor Roth allows for significant tax-free capital accumulation.
  • Recommendations: Start by consulting with tax attorneys and set up a plan.
  • Long-term Plan: Gradually increase contributions.
  • Resources: Mark Ker’s podcasts and blogs for additional information.

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Full transcript