Updated: May 7
Hi RGC... I have gotten many questions over the years regarding different strategies to increase ones after-tax retirement account contributions. Many, including myself believe tax rates are going higher in the future, so getting your money into after-tax status is the best way to protect against that liability, while increasing your wealth in retirement. Take a look at one strategy called MEGA Back Door Roth Contributions...
Here is a quick rundown on the MEGA Back Door Roth Contribution strategy, which allows you to save significant amounts to your Roth IRA every year (30k or maybe more) versus the standard IRA limit of $6,000 per year (+$1,000 if over age 50).
CRA = Company Retirement Account, many times but not always a 401(k) or 403(b)
Let's get started...
You have the ability to contribute more than the 2020 max to your retirement accounts, which is $19,500 + per year (+ 6,500 if Age 50+) into your CRA.
Your company retirement plan must allow for after-tax contributions (this is different than Roth contributions. There is pre-tax, Roth and after-tax contribution classifications.
Your company retirement plan must allow immediate Roth IRA conversions of that after-tax money (after-tax is classified differently than Roth contributions, talk to your tax or financial planner).
You must have ample amounts of after-tax money within the CRA (i.e. > 6k (7k if age 50+) to make this worthwhile, otherwise, why not just do a standard back door Roth contribution?
Your CRA must pass discrimination testing (or be classified as Safe Harbor Plan) which can impact higher income earners as a result of saving significant amounts of money into the the plan.
Note: This is available to Solo 401(k) as well, i.e. Self-Employed Individuals. The benefit to the Solo 401(k) is discrimination testing is not required.
Talk to your CRA provider if you want to inquire if this is available for your CRA.