by Rick Pendykoski | Jan 25, 2023 | Uncategorized
After working for 30 or 40 years, your retirement day arrives. You were busy for a long time and now, you are suddenly free. This ‘free time’ may sound great. But it could soon become boring. Nobody likes a lifelong vacation.
That’s why you should engage your brain and body to do some productive things. You may have had some hobbies in the past or you may have wanted to learn something. However, you didn’t get time to chase your desires. But now you can do anything you want to.
You have money, time, and a relaxed mind. Therefore, the following list is created to inspire you. So, follow these ideas and you may enjoy your retirement days happily.
10 Things To Do In Retirement
- Gardening: Gardening comes at the top of the list. Because gardening is a great way to keep you physically and mentally active. You may love flowers, or you may like fruits. You can bring all kinds of plants and you can create your own beautiful garden. Scientifically, gardening can fill your mind with a sense of satisfaction. So, you would be really happy to see those growing plants and trees. However, the best part of gardening is that you can grow organic flowers and fruits.A garden full of organic fruits means you don’t have to visit the market to buy your fruits. Apart from that, beautiful flowers would make your home look absolutely lovely. Thus, gardening is a wonderful hobby, and you can enjoy it with your family.
- Painting: If you are an artist, then painting could be a great retirement plan. You may not know – How to paint. In that case, you can join drawing classes. Within some years, you would learn painting and people would call you an Artist.You can draw stunning pictures and you can hang them in your rooms. You can improve your painting skills and you can try different types of oil paintings. A truly skilled artist is hard to ignore. So, start learning painting and keep your retirement days busy.
- Crochet: Crochet may look like a simple thing. But it’s a great art and you need an extremely patient mind to learn it. Crochet is different from knitting. Because you use a hooked needle for stitching.With crocheting, you can create scarves to socks. This art can help you to spend time. However, it’s a highly creative art. So, your brain will always stay active. Hence, learn crocheting, stay relaxed, and spend your time creatively.
- Write A Book: Writing a book could also be a good idea to spend your retirement days. Perhaps you wanted to write a story or perhaps you wanted to write a good novel. But because of your job, your writing skill could not come out.But now is the time. Write whatever you want. Even, you can write about yourself and your struggles (autobiography). Many people write poems and great stories. So, write what your heart wants.After finishing your book, you can read it in front of your friends and near ones. They would surely love it.
- Macramé: Macramé wall hangings and plant hangers are truly eye-catching. Macramé is neither knitting nor stitching. In reality, you don’t need any needle to create this art. You just must learn knotting techniques with cotton cords.There are many Macramé knotting styles. So, as a beginner, you should start with simple Macramé kits and ideas. Slowly, you will know this art and then you would create jar hangers, wall hangers, and more complicated artworks.You can gift these beautiful pieces of art, or you can use them to decorate your home.
- Practice Yoga: Staying fit should be your primary goal. Yoga is an ancient art and once you master it, you can keep your body healthy. Yoga is also good for mental health. But it takes a lot of time to master Yoga.If you are patient and if you are a fan of fitness, then Yoga would be a good choice for you. You don’t have to run, and you don’t have to lift heavy weights. Yoga is a simple and effective way to keep your body strong and active. Hence, master Yoga and enjoy peaceful moments.
- Travel and Explore: Some people like to explore every corner of the world. If you are among those people, then you should start travelling. This world is full of interesting cultures, unknown people, and strange food habits. It would be an enthralling journey to know these people and places.You can make a list of your favourite destinations. You may like beaches, mountains, or forests. Apart from that some people like religious places. So, make a list, pack your bags, and explore the world on your retirement days.
- Enjoy A New House: Retirement days should never be boring. So, you should buy a new house miles away from your home. You just don’t have to do anything. You can explore your new locality and you would be spending a great time.You would know – new people, new friends, and a new social life. Furthermore, a new house means a fresh start. So, try this retirement plan.
- Learn Music: Music is perhaps the only thing that can make you forget everything. Hence, start learning music. You can learn piano, guitar, electronic instruments, and more things. Even you can join singing classes.When you would be an expert, you can guide others. Music is the rhythm of life. So, learning it would always keep your mind happy.
- Do Something New: After your retirement, you should try something completely new. You can learn cooking, practice photography, play new sports, or you can renovate your house. In short, you should do something exciting.You can try multiple ideas to keep your retirement life full of colours. Hence, try something really new.
Take Your Pick and Start Enjoying Your Retirement
Many people just spend their days in clubs or in front of the TV. Living a life ‘not-so-creative’ might make your days boring and uninteresting. An active person lives a healthy life. His/her muscles and bones stay strong.
When you immerse yourself in creative jobs, your brain functions improve. Some of the above ideas would teach you some impressive skills. You can show these skills to your friends and your friends would surely praise you.
So, follow the above ideas and you can enjoy your retirement days happily.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
by Rick Pendykoski | Jan 13, 2023 | Uncategorized
Do you know that the thrift savings plan is the world’s biggest retirement plan? Let’s explore this popular retirement plan in greater detail.
What is Thrift Savings Plan (TSP)?
For those working for the federal government, there is a retirement saving and investing account called the Thrift Savings Plan, also known as TSP. It provides government employees with features and advantages that are comparable to those of a 401(k) plan used in the private sector.
The significant features of the TSP retirement plan include matching contributions by the employee, tax advantage, and automatic deductions from payroll for contributions. Federal employees can direct a portion of their monthly income toward long-term savings through the tax-preferred federal thrift savings plan.
Who is Eligible for TSP?
The three most frequent methods to qualify for the TSP are to work for the Federal Employees Retirement System, the Civil Service Retirement System, or to be a member of one of the U.S. armed services, such as the Army or Marine Corps.
What Will the TSP Contribution Caps Be in 2023?
For 2023, the maximum TSP contribution for federal employees and active-duty service members is $22,500. This represents a $2,000 increase from 2022. Your plan might let you make an extra $7,500 “catch-up” contribution if you’re 50 or older. Therefore, you are able to make a total contribution of $30,000 In 2023.
Active military personnel deployed to combat areas and receiving tax-free income are eligible to make contributions up to $66,000. From 2022, this has grown by $5,000.
What Sets Traditional TSP Contributions Apart from Roth TSP Contributions?
The standard TSP contribution and the Roth TSP contribution have many distinctions. Let’s understand through this table in a better way:-
| Criteria | Traditional | Roth |
| Contributions | Pretax | After-tax |
| Take-home Pay | Less money is taken out of your paycheck as taxes are deferred. | More money comes out of your paycheck as taxes are paid up front. |
| Transfers In | Transfers from regular IRAs and qualifying workplace plans are permitted. | Transfers are permitted from accounts that are Roth 401(k), Roth 403(b), and Roth 457(b). |
| Transfers Out | After separation, transfers are permitted to regular IRAs and Roth IRAs as well as to qualifying employment plans. | After separation, transfers are permitted to Roth 401(k), Roth 403(b), Roth 457(b), and Roth IRA accounts. |
| Withdrawals After Separation | It is taxable when withdrawn. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed. | When withdrawn, contributions are tax-free. If you are permanently disabled, have passed away, are older than 59½, and it has been five years since you made your first Roth investment, you can withdraw your earnings tax-free. If you are younger than 59½ and certain requirements are not met, a 10% penalty could also be imposed. |
What Options are There for Investing in TSP?
Following are the 6 popular TSP investment options, each invests in various assets and has its own level of risk.
1. Specific lifecycle (L) funds
Target-date funds and L Funds are also known as life funds. They both operate on the premise that investors won’t need their money for a while. The funds automatically change to reflect risk reductions based on age and the anticipated number of withdrawals from the account. Thus, the L income fund is advised if you’re close to retiring.
2. The Government Securities Investment (G) Fund
The G Fund invests in U.S. Treasury securities with a short maturity. You have a low-risk chance to earn interest rates that are comparable to those on long-term government securities. Their payment is guaranteed by the U.S. government’s full faith and credit, as is the case with all government securities.
3. The Fixed Income Index Investment (F) Fund
The F Fund invests in U.S. government, mortgage-backed, corporate, and foreign government bonds because it is managed to follow the Bloomberg Barclays U.S. Aggregate Bond Index. Although it has a lower to moderate risk profile than the G Fund, this fund is regarded as having a higher level of risk.
4. The International Stock Index Investment (I) Fund
The I Fund invests in an index that closely mirrors the MSCI EAFE Index, exposing it to a wide variety of foreign stocks. As a result, it exposes your account to global equity markets and is generally composed of significant corporations in more than 20 industrialized nations.
5. The Small Cap Stock Index Investment (S) Fund
The Dow Jones U.S. Completion Total Stock Market Index is tracked by the S Fund assets. This fund has a higher risk threshold than the C Fund because it invests in both small- and mid-cap stocks.
6. The Common Stock Index Investment (C) Fund
This medium-risk fund replicates the S&P 500 Index’s performance. Your money is invested in securities provided by large and medium-sized businesses through this fund. If you also invest in an F Fund, investing in this type of fund can assist in reducing risk.
Call us now at (866) 639-0066 to gain chequebook control over your funds.
FAQs
Is TSP the same as 401(k)?
Although tax laws, restrictions, and contribution plans are identical, TSP and 401(k) investing alternatives are considerably different (K).
Does a TSP outperform an IRA?
Both TSP and IRA provide excellent tax benefits for retirement savings. To decide which plan is perfect for you, consider your individual circumstances. Keep in mind that you might be able to save a little in each to benefit from both.
If I leave my job, what happens to my Thrift Savings Plan?
The TSP fund permits you to take your funds with you when you decide to leave your employment.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
by Rick Pendykoski | Dec 21, 2022 | Uncategorized
Roth IRA’s and 401 k’s with Roth subaccounts are getting more and more popular. People are realizing that paying the Tax Man now and never again is very appealing.
I have always said a Roth is like paying taxes on the Seed Money and getting the Harvest for free. But the catch always is: How much tax is it going to cost me?
There are a lot of variables of course but there is a hidden gem just waiting to be discovered. What is this gem – the depressed stock market. A lot of retirement accounts are down 25% – why not consider doing a Roth conversion now. With stocks and bonds lower, the tax bite would be much less. Then when the rebound hits, voila tax free as long as you meet the Roth Rules. A Roth must be in existence for five years and the owner must reach the age of 59 ½.
Roth contributions have annual limits but one huge advantage of doing a Roth conversion is
NO LIMIT how much you can convert! Inside a self-directed 401 k, you can do a Roth Conversion by simply saying ‘today I am going to convert some funds to Roth”. You then transfer those funds from your traditional 401 k account to the designated 401 k Roth account.
As trustee of your plan, you will have to issues a 1099 R to yourself and pay the taxes next tax period. That’s it, no middleman, no custodian and their fees!
One piece of caution is this: Be careful that you don’t convert so much that it nudges you into a higher tax bracket.
No one knows how long this “sale” will last but it is certainly something to look into.
At Self Directed Retirement Plans LLC – we will be happy to discuss with you.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
by Rick Pendykoski | Dec 12, 2022 | Uncategorized
If you are thinking of starting your journey with retirement savings, choosing which retirement plan to go for is the first question you will face. There are several retirement saving accounts, among which the most famous are the pension and 401(k) plans. So, let’s understand what these accounts offer and how they work.
What is a Pension Plan?
Used as a retirement-savings plan, a pension is a fund that gives you a guaranteed monthly payment after your retirement. This works as a workplace benefit where some organizations will need their employee to complete a certain number of years in the company to start receiving a pension.
An employee does not have to make any contributions to a pension plan. Instead, an employer makes all the contributions to their employee’s pension plan. As a result, you only have limited supervision over the contributions made and how you will be able to receive your pension. Since you do not have control over how and when you will receive the pension post-retirement, it will depend on your organization. Some may give their employees their pension in a lump sum after retirement, while some prefer making monthly payments. Although monthly pension payments are more common, they might change from company to company. Some pension plans allow spousal benefits, where your spouse continues to receive your pension funds after your death. If you select this option, it would be difficult to change it later, so be careful before choosing it.
What is a 401(k) Plan?
A 401(k) plan is another type of retirement plan where the employee primarily contributes from their salary to save for retirement. Additionally, your employer can choose to match your contributions, meaning they can fill in additional money to your retirement saving account after making the contribution. For example, let’s assume you contribute 6% of your salary into your 401(k) plan, and your employer matches 50% of your contributions. Further, assuming you earn $100,000, that makes your contribution $6,000 and the employer’s contribution $3,000. A 401(k) plan is a great way to save up some funds for your retirement. However, never indulge in money matters without understanding every aspect of it.
Before you go with the 401(k) retirement plan as your retirement saving account, you need to know that there is a yearly contribution limit that is set by the IRS (Internal Revenue System). Since this retirement account has tax advantages, you cannot make random contributions anytime you want. Instead, the IRS sets a certain contribution limit that changes yearly, adjusting to the cost-of-living conditions of the country.
The elective deferral limit for 2023 is $22,500, which was $20,500 in 2022. In addition to the yearly contributions, people above 50 can make catch-up contributions at the end of the calendar year. The catch-up contribution limit for 2023 is $7,500.
Pension vs 401(k): What’s the Difference?
| Pension Plan | 401(k) Plan |
| Only employer contributes to the plan | An employee contributes and the employer matches the contribution |
| Employer has the full right to decide how to invest funds in it | The employee gets to decide how to invest funds |
| The employer can choose to terminate the plan, and your accrued benefits are frozen | An employer can terminate the plan, and your benefits will belong to you |
| Income is guaranteed | Income depends on your contributions |
1. Contribution Limit
The employees contribute to their 401(k) plan, while their employer can match this contribution. Note that an employer does not compulsorily have to contribute to your retirement plan.
In contrast, a pension plan is sponsored by your employer, where the benefits are calculated with a formula that considers your salary history and employment length. The employer will continue to contribute to your pension plan if you continue working for them.
2. Fund Investment
A 401(k) plan allows you to choose how to invest your funds and select from the various investment options. However, your employer can choose how the funds are invested with a pension plan.
3. Termination of Plan
Your employer can terminate your 401(k) plan, and if that happens, the benefits of this account belong to you. In addition, the employer will have to distribute the assets, and you can roll over the funds to other IRA plans.
In a pension plan, an employer can also terminate it, but here, your benefits are frozen. It means you can receive all the benefits you have earned to the point of termination, but you cannot get any additional credits.
4. Income
With a 401(k) plan, your retirement will depend on your and your employer’s contributions and investment performance. While in the pension plan, the guaranteed retirement income is calculated depending on your compensation, years of service, and age.
Pension vs 401(k): Which is Better for You?
The “better” aspect of your retirement account choice depends on your priorities and the situation. A pension would not allow you to choose your investment choice. If this is your main concern, a 401(k) plan is better for you. Moreover, you get more control of your contribution into your retirement account with a 401(k) as long as you stay within the annual contribution limit. While with a pension plan, your employer has complete control over the contribution amount.
Both of these retirement accounts have their own benefits and drawbacks. Hence, which one is better for you really depends on your requirements and situation. However, if you want to gain more control over choosing the funds you want to invest in and the amount you want to contribute, investing in a 401(k) plan is ideal.
Contact us if you need help deciding which retirement account is best for you!
FAQs
Can a pension plan go bankrupt?
If your employer does not sponsor your pension plan with the Pension Benefit Guaranty Corporation, your pension plan can go belly up. However, since most private plans are insured, the pensioner is protected.
Can I take my pension early?
No, early pension withdrawal is not possible. However, nowadays, several pension operators hold pension advances where you can use collateral for some early pension cash. This offer is attached with high-interest rates and fees. In military pension, this pension advance is illegal.
Can I get early payments from my 401(k)?
You can make early withdrawals in your 401(k) plan, but you will have to pay a 10% fee. However, the IRS has made some exceptions where early withdrawals are not subjected to this additional penalty.
Can I have both a pension and 401(k)?
Yes, you can have both a 401(k) and a pension plan.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
by Rick Pendykoski | Nov 28, 2022 | Uncategorized
An Individual’s financial future significantly depends on creating or taking part in a retirement plan. Knowing all the options for designating a beneficiary is also crucial to the planning.
When picking beneficiaries for retirement benefits, one must take into account the impact of 401(K) inheritance tax and rules, which makes this process distinct from choosing beneficiaries for other assets like life insurance.
This blog post is here to educate you about inheriting an IRA (Individual Retirement Account) or a 401(K) plan. This information is useful to both beneficiary and the person who needs to appoint the beneficiary of their plan.
What Do You Mean by Beneficiary of a Retirement Account?
Your 401(k) beneficiary is the person or organization you designate to receive your account’s profits in the event of your passing. You may specify two beneficiary types:
- Primary Beneficiary: He/she is the person you want to inherit your 401(k) assets first when you pass away.
- Contingent Beneficiary: If your primary beneficiary is unable or unwilling to accept the assets, your contingent beneficiary, or secondary beneficiary, will.
Who Can Be the Beneficiary?
These people/organizations can be appointed as a beneficiary:
- Spouse
When compared to other retirement account beneficiaries, a spouse has the most flexibility. You can generally use the inherited 401(k) from your spouse as your account or take annual distributions (RMDs) in accordance with IRS regulations.
- Family Member/Friend/Children
Inheritance of IRA by children or other family members is also common. What you should be aware of and remember is that the money of 401(k) inherited from a parent, close friend, or a family member must be taken out within 10 years.
- Trust
The most complicated scenario is this one. The way of inheritance will depend on the kind and conditions of the trust.
What Transpires if a 401(k) is Inherited?
On a 401(k) beneficiary designation form, the account owner designates their beneficiaries. If the primary beneficiary is no longer alive or does not wish to receive the money, it is given to the contingent or secondary beneficiaries.
You must choose how you want to receive your inherited 401(k) funds as the recipient. The choices are determined by some elements, such as:
- The relationship you have with the account owner
- Age of the account owner at death
- When did the account holder pass away
- Your age as compared to the account owner’s age at the time of death
- Your wellbeing
- What is permitted by the 401(k)
What are the Different Ways to Inherit a 401K?
The following options are available to you when taking money out of your inherited 401(k):
- Take the Lump Sum
You can take a lump-sum distribution if you want to take out your whole inherited 401(k) at once. This is straightforward and provides you with a sizable infusion of cash, but you have to pay taxes on it all at once. This is not the best strategy if you want to save taxes. The other alternatives in this list allow you to do so.
- Transfer the Funds to Your Retirement Account
If you are sure you wouldn’t need the money sooner, you can transfer the funds to your personal retirement account. This is typically the spouse’s preferred method since it allows them to postpone paying taxes on inherited 401(k) earnings until they withdraw the funds on retirement.
- Follow the 5 or 10 year Rule
You can use the five and 10 year regulations. They allow you to withdraw funds whenever you need to, provided that the entire inherited 401(k) is depleted before the end of the fifth or tenth year following the account owner’s passing, respectively.If the account owner passed away in 2020 or earlier, the five-year rule would apply, and if they passed away in 2021 or after, the ten-year rule would apply.
- Take the RMD
You also have the choice of spreading the withdrawals out over your lifetime by taking annual required minimum distributions (RMD). However, this facility is limited to certain eligible beneficiaries if the account owner died in 2021 or later. In special scenarios, you can take more than your RMD.
How Are Withdrawals From an Inherited 401(k) Taxed?
The payouts from an inherited 401(k) are typically counted as ordinary taxable income for the beneficiary. This would be the case if your parent contributed to a 401(k) before taxes, which is what most people do. Large withdrawals may result in you moving into a higher tax rate, being subject to the 3.8% Medicare surtax, or losing other income-based tax deductions.
However, if your parent first started contributing to their “designated Roth account” at least five years before you start your withdrawals, dividends from a Roth 401(k) you inherit could be tax-free.
What is the Ideal Time to Withdraw Money From an Inherited 401(K)?
There is no one answer or thumb rule for that. When you should withdraw the funds from your inherited 401(k) depends on many factors, such as current tax rate, account size, your medical needs & financial situation, and any life changes you expect in the upcoming 10 years.
Here are some model strategies which you can apply to save tax. However, you should first discuss them with your financial advisor:
- If your tax rate is about to increase, you can either take out a lump sum and reinvest the after-tax funds in a brokerage account or convert the inherited 401(k) to Roth IRA.
- Are you sure your tax rates will stay flat? In that case, you must let a small account grow and take out the RMD over 10 years from a bigger account.
- If the tax rates are expected to go down, the obvious thing is to wait for them to go down before making any withdrawals.
How Does Inheriting an IRA or 401(K) Work for Different Beneficiaries?
- Inheriting an IRA as a Spouse
You have many alternatives if you are inheriting an IRA from your spouse. You can transfer it to your IRA, take RMDs, or you can open your inherited IRA. You also have the option to withdraw the lump sum amount or convert the IRA to Roth.
- Inheriting an IRA as a Family Member
You must take all the money from a retirement account you inherited from someone other than a spouse who passed away after December 31, 2019, before the end of the tenth year after the year of death. Exceptions can be made to this rule depending on your age and health condition.
- Inheriting an IRA as a Trust
The IRS regulations (depending on the type of trust) and the provisions of the trust (based on the intentions of the account owner) will both apply to distributions. Each situation’s outcome will be different. Therefore it’s crucial to talk with the trustee and your financial and legal advisors.
Need Any Help? Contact Us Now!
FAQs
What is the 5-year rule for inherited IRAs?
According to the 5-year rule, by December 31 of the fifth year after the initial IRA owner’s passing, you can withdraw money as you like without incurring any penalties.
What is the tax rate on an inherited IRA? Can I avoid tax on an inherited IRA?
You are not subject to taxes if you inherit a Roth IRA. However, any withdrawal from a traditional IRA is subject to ordinary income taxes.
What are the rules for distributions from an inherited IRA?
There are different rules for different kinds of withdrawals. It depends on whether you are taking a 10 year, a 5 year route, or a lump sum. Each scenario implies different rules.
Does an inherited IRA have to be distributed in 10 years?
Yes. By the end of the tenth year after the IRA owner’s passing, the designated beneficiary must liquidate the account.
What happens if I cash out an inherited IRA?
A lump sum distribution is typically not thought of as the best approach to disperse money from an inherited IRA. This is because you will generally be subject to federal or possibly state income tax on a lump sum withdrawal for the tax year in which it is taken.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
by Rick Pendykoski | Nov 9, 2022 | Uncategorized
Do you want to save money on taxes and boost your retirement savings? If yes, you’ve come to the right place. Mega backdoor Roth is the perfect tool for getting around the tax rules preventing you from accessing the benefits of a Roth account due to falling into the high-income group.
This post explains all the necessary details associated with the working and advantages of mega backdoor Roth.
So, without further ado, let’s get into it!
What is a Mega Backdoor Roth?
The mega backdoor Roth is a contribution method that allows you to contribute after-tax dollars to a Roth IRA. Mega backdoor Roth strategy can be a great way to get more money into a Roth IRA, but there are some things you need to know before you try it.
What’s the Process of a Mega Backdoor Roth?
Pre-tax contributions to 401(k) plans are limited to $19,500 for those under 50 and $26,000 for those over 50. The IRS’s overall contribution cap is $58,000 ($64,500 for those over 50), nevertheless. The average person is unaware that they can make contributions to their 401(k) accounts of up to $64,500.
If your 401(k) plan permits it, you can contribute an extra $38,500 in after-tax contributions after you’ve made the maximum tax-deductible contribution of $19,500 (or $26,000 if you’re 50 or older). If your plan permits in-service distributions or rollovers, you can then move that $38,500 to a Roth IRA.
However, if your employer matches your contribution, that amount is deducted from your overall contribution cap of $58,000 ($64,500 if you’re 50 or older). For instance, if you contribute $26,000 to a 401(k) plan and receive $14,000 in matching funds from your employer, it counts as $40,000 of your total $64,500 contribution.
You are therefore limited to making an additional after-tax contribution of $24,500 that can be converted to a Roth IRA.
What are the Benefits of a Mega Backdoor Roth?
If you invest $38,500 in your 401(k) after-taxes and it increases by $30,000 by the time you retire, you won’t be required to pay taxes on the $38,500 you first deposited because it was done so. However, since the money does not grow tax-free in a conventional 401(k) plan, you will have to pay taxes on the $30,000 in investment growth.
However, if you transfer that $38,500 to a Roth IRA in the same year that you contribute to your 401(k) after taxes, you won’t have to pay income tax on the $30,000 in investment growth and would be able to withdraw money tax-free when you retire.
This is a means to significantly increase the amount of money in that Roth. That’s why it is called the mega backdoor Roth!
What is the Contribution Limit for a Mega Backdoor Roth?
The contribution limit for a mega backdoor Roth is $40,500 after-tax dollars in the year 2022. However, this is apart from the pre-tax $20,500 401(k) contribution limit, which stays in your 401(k) account. Thus, your total contribution limit comes to $61,000.
How Much Can You Convert in a Mega Backdoor Roth?
In a workplace 401(k), the maximum amount that can be saved in 2022 is $61,000, or $67,500 for those who are over 50. How much of that can be a contribution after taxes? The amount fluctuates according to each person’s circumstances. Here’s how to figure it out:
- Start with the $20,500 elective deferral cap in 2022 ($27,000 when catch-up contributions for people over 50 are included). Add any employer contributions or non-elective contributions after that.
- This is deducted from the overall cap of $61,000 or $67,500. The amount an individual can contribute with after-tax money is the balance.
What is the Process of the Mega Backdoor Roth?
If you already have Roth IRA or Roth 401 (k), you need to complete the following process for obtaining the mega backdoor Roth:
- Maximize your employee’s 401(k), 403(b), 457, or Solo 401(k) plan contribution – Pre-tax contributions up to $20,500 would be the maximum (or $27,000 for individuals over 50).
- Contribute to the retirement plan after-taxes – Depending on what the 401(k) allows and whether the employer matches contributions, there are restrictions on how much you can put in.
- Ask for a quick in-service contribution withdrawal of the after-tax amount – This would be made possible by the administrator of the 401(k). The IRS allows investors to divide the withdrawal, sending the investment earnings to a traditional IRA on a tax-deferred basis while solely sending the after-tax contributions to the Roth IRA.
- Transfer the funds to a Roth IRA or Roth 401(k) – Tax-free growth is possible after the funds are in a Roth.
What are the Alternatives to Mega Backdoor Roth?
Not everyone should invest in the massive backdoor Roth. To achieve it, many requirements must be satisfied. There are additional Roth options to think about if those circumstances don’t hold true.
- An individual could be allowed to use the mega backdoor after leaving their work if the retirement plan restricts in-service withdrawals or in-plan rollovers.
- A high earner can be eligible to make direct after-tax contributions to a Roth IRA through the Roth front door.
- Individuals may contribute directly to a Roth 401(k), up to the permitted limitations, if their employer offers one.
- If a high earner doesn’t have access to a retirement plan that permits after-tax contributions or in-service withdrawals, they may want to think about converting their traditional IRA to a backdoor Roth IRA.
FAQs
Will the Roth backdoor be stopped?
The backdoor Roth technique has come under fire for unjustly favoring highly compensated workers in businesses that create their benefit plans to enable these tax shelters.
Mega backdoor Roth IRAs would eventually be banned under the conditions of the Build Back Better plan, which President Biden stated. The law has been adopted by the House, but as of May 2022, the Senate has not done so.
Is a mega backdoor Roth worth it?
If you have additional money to put away for retirement after maxing out your 401(k) and you aren’t eligible for direct Roth IRA contributions, it can be worthwhile to open a massive backdoor Roth. It’s generally a good idea to discuss your specific position with a financial counselor because this method can have complex tax ramifications.
Who is eligible for a mega backdoor Roth?
If you have the standard 401(k) with your employer and your plan permits post-tax contributions and in-service pay-outs, you might be qualified for a giant backdoor Roth. As part of your massive backdoor Roth approach, you could also make post-tax contributions of up to $40,500 in addition to pre-tax ones that are limited to $20,500 in 2022.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning company based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed ira accounts and alternative investments. If you need help and guidance with traditional or alternative investments, call him today (866) 639-0066.
