The MEGA Backdoor Roth: How To Make Tax-FREE Millions

the Roth IRA is literally one of the best vehicles to use to build tax-free wealth in America but sadly most people think that they cannot use the Roth either because of their income level or because of the low contribution limits but little do they know that these limits only exist for people who try to go into a Roth through the front door but if you're willing to step around to the back and come in through the back door you will learn that these limits are a complete myth for the wealthy and it can be for you as well there are people who make millions of dollars and contribute tens of thousands of dollars to their WTH every single year and they do it legally through two very popular Tax Strategies the backdoor Roth and the mega backdoor Roth so look if you want to build a Fortune of wealth pay zero taxes on it later then you will want to watch this episode until the very end if you're new here my name is Sherman I'm a licensed CPA I help people with things like this all the time at my CPAC coach.com and we save people millions in taxes through strategies like this and now you get to learn it for free so be sure to save this video let me know your feedback in the comments below and subscribe if you want more videos that can put more money back into your pockets all right so before we go to the back door let let's make sure you first understand how a Roth Works in very simple terms if you do not understand this nothing else I say will make sense so let's quickly go through this a Roth is simply a retirement account and it is funded with after tax dollars you pay tax on your income first and you use what is left to fund your WTH now once you have money inside of your WTH account you can invest it into different types of Investments like stocks bonds index funds CDs and other Securities or if you create a self-directed WTH You can invest into additional types of assets like real estate private business ventures and much more now the primary benefit of the Roth is that you pay no taxes on the wealth accumulated inside of your account ever you can sell stocks at a game you can earn dividend income you can earn rental income or passive business income it does not matter you will never pay tax on it as long as you follow the rules now because this is a retirement account you cannot withdraw earnings from your Roth until you are at retirement age which is 59 A2 at the time of this video and you also must have had the account itself for at least 5 years but what is very attractive about the rth is that you are actually able to withdraw the dollars you put into it at any time so hi hypothetically every dollar you put into your WTH could be withdrawn you just cannot touch your earnings inside of that account until you retire so that's why people love using the raw it is literally the best way to build tax-free wealth in America but there are two major obstacles people face either a they think that they do not qualify for the Roth because of their income or B they cannot put as much money into their WTH as they would like to and there are two legal methods to get around both of these obstacles the backd door WTH and the mega backd door rth and no these things are not referring to the same thing so listen up to learn how this works let's start with the backd door Roth this strategy is used to get around the income requirements that apply specifically to Roth IRAs a Roth IRA is simply a Roth individual retirement account now anyone that earns income can set up a Roth IRA of their own you do not need a company or an employer to do this however as of 2024 you are not allowed to contribute directly to a Roth IRA if you earn over 161,000 as a single taxpayer or more than 240,000 as a married taxpayer filing jointly but with the backd door Roth you are able to convert not contribute but convert funds from a traditional IRA over to a Roth here is how it works first you need to set up both a traditional IRA and a Roth IRA then you need to make a non-deductible contribution that's very important nondeductible contribution to your traditional IRA now this is the same type of contribution you would ordinarily make to a Roth which is perfect because that's ultimately where we want these funds to end up without incurring additional taxes so once the money is inside of your traditional IRA you can do what is called an inpl conversion or inservice distribution to convert those funds into your Roth IRA and that is how you back into a Roth IRA which will allow you to grow tax free wealth and it gets even better with a mega backdoor Roth which we'll talk about in a second now as of 2024 you can get $7,000 into your Roth IRA or $88,000 if you're over the age of 50 and if you did this for 30 years you would have $1.2 million in taxfree wealth assuming a 10% rate of return now there are two big disclaimers everyone watching this needs to know number one taxes you should owe no taxes on your conversion if you have a zero balance in your traditional IRA and you make a non-deductible contribution to it which basically means you are funding the account with after tax dollars just like a raw but if either one of those is not true you may trigger a taxable event when converting funds from your traditional IRA into a Roth since a traditional IRA is funded with pre-tax dollars and a Roth is funded with after tax dollars any pre-tax dollars converted will result in taxes owed second big thing Investments ideally once you put this contribution into your traditional IRA you convert the funds as soon as possible but if you invest with your traditional IRA and you have earnings when you convert over to a rough those earnings May trigger a taxable event as well so if you are attempting to do this yourself at a minimum make sure you contact your IRA custodian and follow their steps precisely the first time I did this at bangard I was able to call them and have them walk me through every single step or for a more encompassing plan you should consider getting a Tax Advisor involved anyway if you earn high income this is exactly how you can take advantage of a Roth IRA with the backdoor Roth strategy now let's talk about pumping way more money into your rth with the mega backdoor rth strategy by the way if you appreciate this video so far please hit the like button for me below I appreciate it all right so the mega backdoor ra Strat stry is specifically used to get more money into your Roth 401k than the standard contribution limits this is completely different from the Roth IRA a Roth IRA is an individual account and a 401k is an employer sponsored plan this must be offered by your employer or if you own a business even better you can set this up yourself now fortunately with Roth 401ks there are no income limits like Ira but there are contribution limits so let's talk about that and I'll tell you how to get more in as of 20124 individuals can contribute up to $23,000 to their Roth 401k as an employee or $3,500 if they are over 50 and then the business can match up to 25% typically they don't but they can up to 25% up to $46,000 now that $46,000 number is what I want you to pay attention to the mega backdoor strategy seeks to maximize your contributions there if your business or employer does not use the full contribution amount to put into your Roth 401k then you can make up the difference so let's say you are under the age of 50 and you put the max of $23,000 into your Roth 41k and your employer put in let's say $5,000 under the mega back door strategy you could get up to $41,000 more into your Roth 401k account so hypothetically you could get a total of $69,000 into your Roth 401k if you are under 50 or up to $76,500 if you are above the age of 50 in 2024 if you just did that for 10 years you would have over $1.4 million in your retirement account with just a 10% rate of term so let's talk about how this is actually done in practice now three things must be true in order for you to use the mega backdoor rough strategy number one your 401k plan provider must allow after tax contributions some of them do not number two your plan must also allow inpl rth conversions or inservice distributions and number three you should have the extra income available to contribute more money money to your Roth above the standard Roth IRA and employee 401K limits that is the case the process is very simple all you have to do is determine the amount you want to contribute and make it as an after tax contribution to your traditional 401K then once funds settle immediately initiate an inpl conversion to get those funds into your Roth 401k then you can invest those funds and build taxfree wealth inside of your raw now remember if you convert any pre-tax dollars or earnings inside of your traditional 401k to your rough you will likely trigger taxes on the conversion you want to make an after tax contribution to it that part is key but if you already have pre-tax dollars inside of your 401k you may be unable to avoid taxes on the conversion and that may not be a bad thing depending on your your strategy but you just need to be careful so consult your CPA for specific advice regarding your unique circumstances and if you need a good one just go to my CPAC coach.com to apply to work with one of my vetted CPAs today

Channel: Sherman - My CPA Coach

Views: 2,327

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Id: 2DauUIG50wM

Length: 11min 17sec (677 seconds)

Published: Tue Mar 05 2024