4 Ways To Get More Money Into Tax-Free Roth Accounts, #210

Retire With Ryan

Why would you want to make a Roth contribution? If you believe tax rates will be higher in the future, it could benefit you. How? The contributions grow tax-deferred. When you withdraw the money, it’s tax-free. A tax-free income can be very beneficial in retirement.

In 2024, you can contribute $7,000 to a Roth IRA. If you’re over 50, you can contribute $8,000. However, there are income limits for the contributions. Individuals who make over $161,000 can’t contribute.

Thanks to the 2017 tax cut, there are some additional ways you can contribute to a Roth IRA. I cover four ways you can get money into Roth accounts in this episode of Retire with Ryan.

You will want to hear this episode if you are interested in...

• [1:34] How to make a traditional Roth IRA contribution
• [4:06] Option #1: The Backdoor Roth IRA
• [8:06] Option #2: Contribute to a Roth 401K
• [9:16] Option #3: Do a Roth conversion
• [13:17] Option #4: A Mega Backdoor Roth IRA

Option #1: The Backdoor Roth IRA

Let’s say you’re contributing to a Roth IRA indirectly (I talked about this in episode #176). To do that, you have to set up both a transitional and Roth IRA with the same company. Then, you make a non-deductible contribution to your traditional IRA. After that, you fill out a request form to convert that money to the Roth IRA. They’ll move it for you. What’s the biggest mistake you have to avoid when doing this? Listen to find out!

Option #2: Contribute to a Roth 401K

If you have the option to contribute to a Roth 401K, use it. Why? Because there are no income limits on who can contribute to a Roth 401K. You could make well over the limits to contribute to a Roth IRA and still make a contribution. In 2024, you can contribute $23,000 to a Roth 401K or $24,500 if you’re over 50.

Option #3: Do a Roth conversion

Currently, everyone can convert money in a traditional IRA or 401K into a Roth IRA or 401K. Let’s say you have $100,000 in an IRA that you want to convert. You’d have to pay Federal and State tax on the $100,000 you’re converting plus any other earned income for the year.

When would this make sense? You don’t have to pay a 10% penalty on the conversion if you’re under 59 ½. Secondly, if you think you’ll be in a higher tax bracket in retirement, and don’t need access to the money now, it might make sense to roll it over. It will have time to make back the money you had to pay in taxes upfront.

But your plan has to offer a Roth 401K. You’d choose the amount you want to convert from the traditional IRA to the Roth 401K. You’d pay taxes on the amount you’re converting. 40% of 401K plans offer this feature. But you have to consider if the conversion will push you into a higher tax bracket.

Option #4: A Mega Backdoor Roth IRA

Some 401K plans allow contributions above the traditional $23,500 limit. The IRS has a total pension profit-sharing contribution limit. For 2024, that number is $69,000. That’s the total that your employer can contribute to your retirement plan. Let’s say you and your employer contribute $30,000.

Because you haven’t hit the maximum, there’s an additional $39,000 that can be contributed to your 401K as an after-tax contribution. Then you have to convert it to your Roth account. That’s the Mega Backdoor Roth IRA. If you’re over 50, you can also contribute the additional $7,500 catchup.

Government 457 plans and most 403B plans don’t allow this after-tax contribution. Many 401K plans do.

How do you get the most out of that contribution? Find out in this episode!

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• Fiduciary: How to Find, Hire, and Establish an Aligned and Trusted Partnership with a Fee-Only Financial Advisor
• 7 Backdoor Roth IRA Mistakes to Avoid
• How a Mega Backdoor Roth IRA Can Accelerate Your Retirement Savings

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