Mega Backdoor Roth Strategy Transcript

0:00
The mega backdoor Roth is my favorite tax and wealth-building strategy all bundled up into one. It is a way you can get $70,000 of Roth money where you pay no tax as you’re making money and no tax as you pull the money out in retirement.

0:13
You can do that every year utilizing the mega backdoor Roth strategy. Now, in today’s video, I’m going to break down why you want this, how it works, what are the qualifications, and the actual steps you’re going to need to get $70,000 of Roth money set aside every year.

0:28
Now, you could only put $7,000 into a Roth IRA. So, how are we getting to 70 grand every year, Matt? How are we doing 10 times that? Well, we’re using a 401k.

0:38
This could be the 401k at work where you may work. This could be your solo 401k for any of you self-employed. Okay, I’m going to break down how you utilize and execute the strategy to get 70K in every year.

0:51
All right, so now this assumes that you have a 401k. Now, I want to say this at the outset. For those of you that are self-employed where you do have employees in the business and you have a company 401k plan, this doesn’t work for you.

1:01
But if you’re an employee at a company, a high-income earner, if you’re a self-employed person with no employees using a solo 401k, this is something you should be thinking about because you can utilize and execute the strategy to get 70K every year.

1:14
All right, let’s break down how this works. Now, the reason we use 70K and why that is the number is that is the maximum amount of money you can put into a 401k.

1:23
Now, if you’re 50 plus, you get another $7,500. So, $77,500. And even those 60 plus, there’s a little additional few thousand you can put in every year. But I’m just going to say 70K in general, because that’s the number no matter what age you are, you can at least put away utilizing the mega backdoor Roth strategy.

1:40
All right, now let’s talk about how you actually get the money in. Well, the first thing we’re going to do is you’re going to use the $23,500 you can do as an employee contribution into a 401k.

1:48
Every 401k out there allows for this, and 99% of the 401ks allow for Roth 401k dollars. Okay, remember this is the mega backdoor Roth strategy here. So, we want to do Roth contributions.

2:00
Most 401ks have a company match where the company matches how much money you’ve put in, and they do a certain amount of match based on your salary. Let’s say for this example, you make $300,000 a year, and let’s say your company does a 4% match. That’s very common.

2:15
That means they’re going to put in $12,000 into the 401k for you. Now, when the company puts money in, this is a new law that passed a couple of years ago. The match can be Roth dollars.

2:27
A lot of companies still do traditional dollars as the match. That’s just how they’ve always done it. And that’s fine. You can convert it to Roth at the end of the day. We’ve got another 12,000 of Roth dollars here.

2:36
So, between my 23,500, the match from my employer of 12,000, we’ve got 35,500 in. But how do I get to 70, Matt? A lot of people get stuck here and they think, “Well, I’ve maxed out my 401k. What do I do next?”

2:51
Hey, I’m cutting in here because I want to make sure you know all the stuff I’m talking about on my YouTube channel. Investing in alternative assets, whether it’s real estate or private funds or private equity, oil and gas, crypto, saving on taxes. All these concepts I love, and I talk about here.

3:04
I want to let you know we do this at my company, Directed IRA. So, get on over to directedira.com/call and book an appointment with one of our self-directed IRA specialists that’ll help you understand how to take control of your retirement.

3:18
Well, the first thing I’d say is go to a backdoor Roth IRA. By the way, you can do $7,000 a year in a backdoor Roth IRA independent of this strategy. And that’s pretty easy. Watch the video here where I break down the backdoor Roth IRA and how you can utilize that.

3:34
But I still got $34,500 left of contributions to get to that 70,000 max. What do I do? How am I getting that 70k? Well, the answer is you’re going to make what’s called an after-tax contribution to the 401k.

3:50
This is a little unique contribution. It’s not as common. The frontline customer service person may not know what this is. The HR person that works on your 401k plan has maybe talked to two people over their 10-year career that have actually done this.

4:01
This is a loophole, but I’m just saying it’s not like right on the menu staring you in the face. So, you will ask, does the plan allow for after-tax contributions? About 40 to 50% of 401k plans in the US allow for after-tax contributions.

4:15
If your plan allows for after-tax contributions, what that means is we can fill the rest of the money up to the 70k with what is called an after-tax contribution of this 34,500.

4:30
So I throw in 34,500. This could be a one-time thing you put into the 401k. You could be doing it over time. Frankly, most of our clients over the years that have utilized this strategy just do a one-time contribution in from their personal bank account. It’s typically not coming off of payroll.

4:44
All right. Now I’ve got that $34,500 in. I’ve got a total contribution to the 401 (k) of $70,000. You must follow this next step, and this is critical. You have two options.

4:57
Option one is to do an in-plan Roth conversion. What that means is you’re taking this after-tax contribution bucket and converting it to Roth. You actually have to do that, and there’s a form you’ll fill out to do it.

5:11
Now, generally, when you convert dollars to Roth, you’re typically converting traditional pre-tax dollars over to Roth. You took a tax deduction on it. So, you have to pay tax when you convert. But when you convert after-tax dollars, you never took a deduction. It becomes Roth dollars, and there’s no tax.

5:29
So voila. I just filled out a form, and this $34,500 is now a Roth 401k in my Roth 401k plan, just like the $35,500 of other dollars I put into the 401k.

5:43
Now option two is better, though. I actually prefer you to do option two, and this is rolling out the after-tax contributions to a Roth IRA.

5:52
Generally, 401k dollars for a company where you still work and are employed are locked down until you retire. But there is an exception for after-tax dollars. You can roll out after-tax contributions whenever you want. Even while you’re still employed there, even at 40 years of age, you’re not yet retirement plan age.

6:12
So, I can roll those dollars out as just after-tax dollars and receive them directly into a Roth IRA. Now, at Directed IRA, we receive these all the time. A lot of high-income earners are utilizing this mega backdoor Roth strategy, and they open up a Roth IRA with us to receive this $34,500 of after-tax contributions.

6:35
We receive it into the Roth IRA, and now it’s just Roth IRA dollars. No Roth conversion required, growing as you’re investing it with no tax and coming out tax-free at retirement.

6:45
Now, the reason I like the Roth IRA here and rolling it out of the 401k plan is twofold. First, you have more investment options in a Roth IRA. So, like if you’re at Directed IRA, you can buy real estate with your Roth IRA. Invest in a private fund, invest in crypto, in a startup. These are all investments an IRA can own.

7:05
And particularly Roth IRAs, the most popular account that we have here. So, you have more investment options. Sure, you could buy a stock or a mutual fund here as well, but most of our clients are coming here to buy a private non-publicly traded asset. It’s what we do at Directed IRA every day.

7:18
So, that’s one reason: just greater investment options. The other reason is there’s fewer fees in an IRA. Okay, your 401k plan, the average 401k plan has 1 to one and a half percent fees. If you have a $100,000 account, you’re paying $1,500 in fees.

7:34
All right, so there’s typically more fees also on a 401k plan. You can analyze that depending on your situation, but look at the investment options you may want to invest in as you’re considering whether to roll out or keep it in plan, and also look at the fees that you’ll pay for the IRA versus what you’re actually paying in plan leaving it in the 401k.

7:51
All right. Now, remember, there can be two snags to the mega backdoor Roth. First, any of you business owners where you want to do this strategy, but you also have employees in your company 401k, this doesn’t work for you, sadly.

8:03
If you’re self-employed with no employees using a solo 401k, we love those. Set those up for clients every day. You can do the mega backdoor Roth. You can do that every year.

8:11
Also, if you have a 401k at an employer where you work, this is easier. Now, the second snag and the last you need to worry about is the plan must allow for after-tax contributions.

8:20
When you think about this whole strategy here, what’s the loophole in it? Well, the loophole is this after-tax contribution. That’s what allows you to get up to this maximum of $70,000 where in the example here we put $34,500 more away in Roth dollars because we were able to do an after-tax contribution.

8:41
So, a lot of plans do allow for that, but make sure you check that before you start executing on this strategy.

8:46
I hope this video has helped you understand how to execute on one of the best tax and wealth-building strategies out there, the mega backdoor Roth. Please subscribe to my channel. I’ve got a lot of tips on how to build retirement, save on taxes, protect your assets. I’m Matt Sorensen.