November 2021 Issue: A Mega Planning Opportunity for High-Income Clients: the Mega Backdoor Roth-A Mega Planning Opportunity for High-Income Clients: the Mega Backdoor Roth by Janelle Fumerola and Alyssa Yocom

A Mega Planning Opportunity for High-Income Clients: the Mega Backdoor Roth by Janelle Fumerola and Alyssa Yocom

Pdf Summary

The article discusses the mega backdoor Roth strategy as a planning opportunity for advisors with high-income clients. This strategy allows high-income earners to participate in after-tax savings and tax-free investing by converting after-tax contributions to a qualified plan into a Roth IRA. The article explains that high-income clients with sufficient cash flow, employees who can maximize retirement plan deferrals, sole proprietors with solo 401(k) plans, and clients expecting to be in a high tax bracket during retirement can benefit from this strategy. <br /><br />The article outlines how the mega backdoor Roth conversion works. It involves deferring up to the annual limit set by the Internal Revenue Code, receiving employer contributions, contributing after-tax contributions up to the Section 415 limit, and converting the after-tax contributions into a Roth IRA or Roth 401(k). The article also highlights considerations for employers who want to add this capability to their plans, such as altering the plan description and conducting annual testing for compliance.<br /><br />Advisors should keep in mind that clients should have a high income with sufficient cash flow, the qualified plan must allow after-tax contributions, and the balance in a Roth 401(k) may be rolled into a Roth IRA. The article recommends confirming the exact process with the client's plan administrator before execution and acting fast in case Congress eliminates this opportunity.<br /><br />Overall, the mega backdoor Roth strategy can help high-income clients build additional tax-free investment savings and reduce taxable investment income. It provides a way for clients to save for retirement in a tax-efficient manner.

Keywords

mega backdoor Roth strategy

high-income clients

after-tax savings

tax-free investing

qualified plan

Roth IRA

cash flow

retirement plan deferrals

solo 401(k) plans

taxable investment income