Summary In this conversation, Mark Struthers discusses the concept of the mega backdoor Roth, a strategy that allows individuals to maximize their retirement contributions and tax benefits through their 401k plans. He explains the differences between traditional and Roth contributions, the importance of free cash flow, and the potential for significant contributions for those over 50. Struthers also navigates the complexities of 401k plans, Roth conversions, and the pros and cons of transferring funds to IRAs, ultimately emphasizing the benefits of the mega backdoor Roth strategy for a healthier and wealthier retirement. Takeaways -The mega backdoor Roth allows for significant tax-free retirement savings. -Understanding your 401k plan is crucial for maximizing contributions. -Free cash flow is essential for utilizing the mega backdoor Roth strategy. -The contribution limits for 401k plans can be quite high, especially for those over 50. -Roth conversions can be complex but offer valuable tax benefits. -Not all 401k plans allow for non-Roth after-tax contributions. -Transferring funds from a 401k to an IRA has both advantages and disadvantages. -It’s important to be aware of your plan’s rules to avoid penalties. -The catch-up contribution for those over 50 must be in Roth dollars under new regulations. -The mega backdoor Roth can be a game-changer for retirement planning, especially for high earners. Sound Bites “Mega backdoor Roth is pretty cool.” “The catch-up has to be Roth dollars.” Chapters 00:00 Introduction to Holistic Retirement Planning 01:02 Understanding the Mega Backdoor Roth 03:01 Maximizing Contributions and Tax Benefits 05:58 Navigating 401k Plans and Roth Conversions 09:05 Pros and Cons of 401k to IRA Transfers 10:01 Final Thoughts on Mega Backdoor Roth Strategy Curious about working with Mark: https://www.videoask.com/fd9svtp2l www.SonaWealthAdvisors.com Disclosure Investment advisory services are offered through Sona Financial LLC (DBA Sona Wealth Advisors, Sona Wealth, Sona Wealth Management), an investment adviser registered in the state of MN. Sona Financial only offers investment advisory services where it is appropriately registered or exempt from registration and only after clients have entered into an investment advisory agreement confirming the terms of engagement and have been provided a copy of the firm’s ADV Part 2A brochure and document. This video is for educational purposes only. Nothing discussed during this show/episode should be viewed as investment advice. If you have questions pertaining to your specific situation, please consult your own financial professional.
Unedited Transcript:
Mark Struthers (00:00.194)
Welcome to the healthy and wealthy retirement, where your certified retirement counselor Mark Struthers takes a holistic approach to retirement. Going beyond finances and embracing holistic wellbeing, this YouTube channel will address not just the financial part of retirement, but also the social, the physical, and the emotional parts of retirement. Everything you need for healthier, a wealthier, and happier retirement.
Mark Struthers (00:33.048)
Here is your host, Mark Struthers. Welcome. Welcome to the healthy and wealthy retirement. am Mark Struthers and today we are talking about mega, mega, mega, mega, mega backdoor Roth. And it sounds cool. and it is pretty cool. but just tossing the word mega reminds me of those monster truck rallies. The grounds already shaken, the mega backdoor Roth Roth or
Super large backdoor Roth is not to be confused with a normal backdoor Roth. And that’s separate podcast. This one is designed to operate all within, mostly within, most often within your work 401k. As a reminder with Roth assets, they’re never teched, they’re not never teched in the future. It’s techs.
taxable going in, but tax free coming out, earnings and contributions, assuming certain rules are met. One of the biggest things with a back door, with a mega back door office, you have to have a lot of free income. The reason being you really have to max out your employee contribution, which if you’re over 50,
50 for 2024 that is all the way up to over $30,000. 23,000 if you are under 50. This YouTube podcast folks who are under 50 are going to find it useful, but this is a mostly at folks who are in their 50s and 60s or even in retirement. So you have to have a lot of free cash flow, but for a lot of folks, if they can do it, it.
It is pretty cool.
Mark Struthers (02:31.742)
And I will point out that I think one of the secure acts this I think was on the chopping block. I think as they look to find more tax revenue with budgets and spending being the way they are, it was slated to be eliminated, but it was not. And, you know, I would go, go with the flow for now. You know, if you’re on the fence, that might push you over to say at some point, these might be.
might be made illegal. One way to think about these, the reason of a mega works is to think about kind of different buckets that your 401k is like one big pie or is has several different buckets of it. And maybe buckets is a better analogy. So you have your employee contributions, your employer contributions, and those can be Roth or traditional.
The employee or contributions have always been traditional that is changing here at some point in the future. But you also have not just traditional and Roth, but you have what I call really not our not rat. So non Roth after tax and a are an RAT. They’re there. It’s like making a non deductible area contributions. You don’t get a tax deduction, but it’s not in the Roth.
and it goes into this third bucket, if you will. so you have traditional, have Roth, and then you have this third bucket, this third piece of the pie, where you can make larger contributions than most people realize. The reason being, the rule as far as the max contribution to the 401k is quite high. So over 50, it’s 76,500, because you have the 7,500.
catch up provision, catch up provision you have for IRAs as well. Now it’s not the same amount, but and even HSA is a different age, but even with HSA. So that is that is quite high. And then for for someone under 50, it’s sixty nine thousand. So for those of you that are watching on YouTube, we’ll flash up a graphic that gives you an example that if you’re say you’re over 50,
Mark Struthers (04:58.478)
You’re looking to really max things out. So you have a total contributions available between you and the employer of seventy six thousand five hundred dollars. That is a lot of money. This is a luxury. This is a good problem to have if you can do it and say you max out your employee contributions with the catch up of thirty thousand five hundred. You know, and do notice that the max the max that you can put into the 401k is increased by that seven thousand five hundred over fifty.
or 15 over catch up contribution. So you have your total available contribution between employee, employer of 76,500 because you’re over 50. And then part of that is you can contribute as an employee, 30,500 with the 7,500 catch up. And remember these figures change each year. So don’t get too hung up on the exact number. If you’re looking at 2025, the numbers are probably going to change, not a lot.
The most important thing is that you kind of understand the concept. And we’re going to assume an employer match of say $3,000. So you take the $76,500 and even if you’re listening to the podcast, you can probably kind of do this in your head. And then you subtract out what the employee and employer put in and kind of a normal situation. So $33,500 and that leaves $43,000 of unused potential. Now the employee or could certainly contribute more.
And that would be, that number would be reduced, but that’s where the mega backdoor Roth is. And our example, you could contribute if the plan allows. And I don’t think I actually hit on that quite as hard as I should have. If the plan allows a lot of plans don’t allow the non Roth after tax contributions. They just don’t do it. But there are some that do, so it’s worth looking into. So the 43,000 then can be made by the employee.
And and what happens quite often is you are able to do a Roth conversion Again, it’s like a backdoor Roth You to make the contribution you don’t get the deduction. It’s not Roth’s until you actually convert it then you convert it Some plans might might even allow you to have it stay there now keep in mind that that gets a little complicated because you have non Roth after-tax dollars and you have earnings that are pre-taxed and that if you do convert it it
Mark Struthers (07:29.389)
That portion would be taxable. So one of the FYI is I have is Hopefully you can automate it not all plans allow this or you’re gonna have to actually mainly go in there and do it if There are if there is any growth in the assets when they’re in there That’s going to be taxable because that growth hasn’t been taxed and that they’re not Roth dollars Also some plans do allow you to kind of designate different withholdings So a lot of folks do this with like a bonus if you’re a well-paid manager, director, and you have a large bonus and you’re living off of your normal earnings, that’s a chance where you might be able to do
Also, some plans do allow you to roll that 401k into a Roth IRA. Now, not all plans are going to allow this. mean, and you could kind of understand why, because there’s a lot of bookkeeping that goes on here. But some plans allow you to do it actually almost instantaneously, where you can put it in, convert it, then roll it out. So you’re just kind of moving it around to different account types. That is pretty cool. That is mega.
Mega, mega, But just keep in mind, any time you’re moving funds from a 401k to an IRA of any kind, just be aware of the pros and cons. People like it because of more control. It’s not tied to your employer and you have larger, much larger investment options. But you also lose out on things as some protection from lawsuits, creditor protections, you know, and it’s going to vary with each state.
Sometimes the fees in 401ks are lower for the investments. Not always. Sometimes they’re actually quite a bit higher. 401ks often have kind of stable value or guaranteed investment contracts. There’s like a money market fund that has a minimum amount available to those you can’t get in an IRA. Another FYI, make sure to avoid any penalties.
Mark Struthers (09:32.423)
God just make sure you know your plans rule if you violate one of your plans rules quite often they could punish you by not allowing you to contribute which would mean you would also miss out on the match plus any tax deduction or anything like that. Lastly another F.Y.A. Part of the secure act that I wouldn’t be surprised if this one got moved again. You see this lot with FASFA and some of these rules they get pushed down the line or changed or modified that
that if higher earners that are over 50 and doing a catch up, the catch up has to be Roth dollars. So that’s just a word of caution. Because quite often, you folks who have enough income to do a mega backdoor Roth, they’re quite often higher earners, higher tax brackets. Quite often, not always, but quite often they are in situations where maybe Roth’s making a
Normal Roth contribution isn’t the best thing. They want those tax deduction, but they’re trying to just get as much money as they can to retirement accounts. And they’re kind of maxed out there, the accounts that get the tax deduction. So there you have it. This mega backdoor Roth is a great way for you, for some folks who, especially if you’re approaching retirement, and maybe your kids are on their own, that maybe you could sock away a bunch of money in Roth dollars that you didn’t think you could do.
And there’s no, there’s no income limits because it’s within the 401k. It’s not like you’re trying to make a Roth IRA contribution limit. So using a mega backdoor Roth could be one of the things that helps you have a healthier, a wealthier and a happier retirement. Stay well everyone. Don’t forget to hit subscribe because you want a and happy retirement.