How to Execute a Mega Backdoor Roth IRA Contribution, Ep #152

What is the Mega Backdoor Roth IRA Contribution? How can it be a game-changer for some high-earning individuals who are already maxing out their 401k plans? If you’re investing the maximum you can a year, think of how quickly you can hit financial freedom. If you’re passionate about investing as much of your income as you can—this is the episode for you. I explain the step-by-step process of finding out if you qualify. Don’t miss it![bctt tweet="How do you execute a Mega Backdoor Roth IRA contribution? Find out in this episode of Best in Wealth! #wealth #retirement #investing #invest #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""]Outline of This Episode[1:33] Dissecting the total compensation package[4:34] Executing a Mega Backdoor Roth IRA Contribution[6:55] Does your 401k plan allow non-Roth after-tax contributions?[9:46] Is there room under the ACP test to make additional contributions?[11:39] Calculating how much you can contribute[13:23] Does your plan allow for in-service distributions?[16:44] Are the non-Roth after-tax contributions moved to a separate account?Mega Backdoor Roth 101The first question you have to ask: Have I made the maximum salary deferral contribution of $19,500 into my 401k? If you’re 50 or older, have you contributed $26,000? If you haven’t maxed it out, you don’t qualify for the Mega Backdoor. You have to focus on maxing out your 401 contributions first.Secondly, Does your 401k plan allow non-Roth after-tax contributions? The answer can be found in your summary plan description. Your employer is legally required to give this to you when you’re hired—and if you ask for it again. If you login to your 401k provider’s website, you’ll often find it under the “documents” tab. If you can’t find it, email your HR rep and ask for a copy.If your plan doesn’t allow the non-Roth after-tax contribution—you can’t move forward. If it IS allowed, you can contribute above and beyond $19,500 (or $26,000). You CAN continue along this journey. The truth is that most plans don’t allow this, but it’s worth finding out.Is there room under the ACP test to make additional contributions?An ACP test is typically conducted each year to make sure the 401k plan doesn’t unfairly benefit a highly-compensated employee. It limits the amount that highly compensated employees can make. If you’ve maxed out your 401k, you’ll likely fall into that category. Ask your plan sponsor if you’re considered highly-compensated.What happens if you don’t ask? When the ACP test is done at the end of the year—after you’ve made the contributions—the money you contributed can get sent back. But if the plan sponsor says you aren’t considered highly compensated, you can move forward.[bctt tweet="In this episode of Best in Wealth, find out how to calculate how much you can contribute to a Mega Backdoor Roth! #wealth #retirement #investing #invest #PersonalFinance #FinancialPlanning #RetirementPlanning #WealthManagement" username=""]How to calculate how much you can contributeHow do you calculate how much you can contribute? Add all of the employee and employer contributions that have been made this year—unless you’re 50 or over. You do NOT count the extra $6,500 contribution. Once that’s added, subtract it from $57,000. Why?In 2020 you can make up to $57,000 worth of retirement contributions inside of your plan. If you have more than one 401k, add up every plan you've contributed to. So you take $57,000 and subtract $19,500 and what your...