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21Feb

Benefits of a Mega Backdoor Roth

BlogFebruary 21, 2023

One strategy for retirement planning that has gained popularity in recent years is the Mega Backdoor Roth. This is a savings strategy that allows high-income earners to contribute large amounts of after-tax dollars to their retirement accounts.

What is a Mega Backdoor Roth?

A Mega Backdoor Roth is a savings strategy that allows high-income earners to contribute additional after-tax dollars to their 401(k) plan, beyond the traditional contribution limits. This is done by using the non-discrimination testing exception, which allows employees to contribute up to the IRS annual limit ($19,500 in 2022) to their 401(k), and then contribute additional after-tax dollars up to a plan-specific limit. These after-tax dollars can then be rolled over into a Roth IRA, where they can grow tax-free.

Benefits of a Mega Backdoor Roth

Tax-Free Growth

The primary benefit of a Mega Backdoor Roth is the tax-free growth of contributions. Once after-tax dollars are rolled over into a Roth IRA, they can grow tax-free, meaning that retirees can withdraw the money without paying taxes on the contributions or earnings. This can be a significant advantage for high-income earners who are in higher tax brackets.

More Savings

The Mega Backdoor Roth allows high-income earners to save more money for retirement. By contributing after-tax dollars to a 401(k) plan and then rolling them over into a Roth IRA, individuals can save more than they would be able to with traditional contribution limits. This can be particularly beneficial for individuals who are behind on their retirement savings.

No Required Minimum Distributions

Another benefit of a Mega Backdoor Roth is that there are no required minimum distributions (RMDs). Traditional IRAs and 401(k) plans require individuals to begin taking distributions at age 72, which can result in higher taxes and potentially push retirees into higher tax brackets. With a Roth IRA, there are no RMDs, allowing retirees to let their money grow tax-free for as long as they choose.

Estate Planning

A Mega Backdoor Roth can also be a useful tool for estate planning. By contributing after-tax dollars to a Roth IRA, individuals can leave a tax-free inheritance to their beneficiaries. This can be particularly beneficial for high-net-worth individuals who are concerned about estate taxes.

Overall, a Mega Backdoor Roth can be a powerful tool for high-income earners to save more money for retirement and take advantage of tax-free growth. However, it’s important to note that this strategy is not suitable for everyone. Individuals should consult with a financial advisor to determine if a Mega Backdoor Roth is the right strategy for their retirement plan. With careful planning and the right strategy, retirees can maximize their savings and prepare for a comfortable retirement.

18Feb

A Retirement Strategy Offering Both Savings and Income

Podcast BlogFebruary 18, 2022

In economic uncertainty, finding answers that provide both savings and an income during retirement becomes challenging. While you try to recover from a downturn, so are companies. And history speaks for itself: employee retirement programs are usually the first cut. This was seen after the Great Recession when corporations across the U.S. reduced and eliminated 401(k) matches. More recently, with the Covid-19 crisis, some companies have begun reducing retirement programs and other employee benefits to aid in recovering from the crisis.

Since retirement is up to the employee, you want something that will withstand the market fluctuations, lower risk, and provide a promised regular income: annuities. As an insurance product, annuities are either done with a single, lump sum payment or recurring premiums that will grow and provide retirement savings and income stream.

Overview of Annuity Types

Variable annuities often yield higher returns because they are directly tied to the consumer’s investment choices. However, they can be decrease in value when the market experiences a downturn. No guarantee is offered with interest or principal protection with these annuities.

Fixed annuities accrue interest off a fixed interest rate set at the beginning of the contract. These are written in stone for a set number of years, meaning they cannot decrease in value for that time. Thus, these annuities offer some protection guarantee, have low yields, and offer low risk.

Fixed indexed annuities are a middle ground of the other two annuities. Based on the performance of a specific index, they provide guaranteed principal protection. Risk is medium with this annuity and has a capped yield that becomes part of the annuity income stream.

Ways Annuities Lower Risk in Retirement

Lifetime income – After accumulation, income payments can be received as either a lump sum, an installment payment for a set number of years, or lifetime payments depending on the rider. This may come with a fee, but some riders have no fee associated.

Tax-deferred – As long as funds remain in the annuity, your savings will remain protected from the yearly taxation on interest. As a chance to earn interest on interest, principal, and on taxes deferred, you get ahead on retirement assets that is not typically available with other retirement accounts.

Principal protection – Protecting your hard-earned money will help reduce retirement risks you will face. With fixed and fixed indexed annuities, your principal investment is protected with the chance to grow and become a stable income stream for retirement.

Growth – Annuities offer a flexibility for growth that may be capped or have a participation rate. These are linked specifically to market indexes. A variable annuity has the potential for a high growth rate, but fixed or fixed indexed annuities allow for participation but less risk.

For more information on how annuities can reduce and eliminate risk in your retirement, please listen to The Retirement Risk Show episode, “The Crossroads of Longevity and Volatility: How Annuities Help.”