Two speakers explain tax strategies for high-income executives: how backdoor Roth conversions work, the difference between Roth and after-tax accounts, and the mega backdoor Roth technique that lets you move after-tax contributions into a Roth for tax-free growth.
Let's talk about tax-advantaged accounts too. Uncle Sam gives us a few opportunities to do some tax deferral, which is in the form of retirement accounts and a few other accounts. So, a lot of executives feel like they're already maxing that out. I think when you're at that $300,000 level, a lot of people are already kind of taking full advantage of the 401(k) at a minimum. What else kind of gets overlooked? What are some of the other opportunities? And we hear this term thrown out there all the time, mega backdoor Roth. Is that something that something is worth considering in this situation.
I think first for the viewers, we need to kind of talk about the backdoor concept, period. They give us an opportunity to do a Roth IRA, and the difference between a Roth IRA and the ones that we're all used to is just the taxability. In a Roth account, I'm actually putting in money that I've already been taxed.
Yes.
And so once I put that money in, The rest of the way should be tax-free. As long as it's a qualified distribution, that money is going to be tax-free. Okay. For forever.
Yeah.
The problem is you have to meet certain income thresholds in order to qualify to make that contribution.
Yeah.
And most of the executives that are listening to this video probably don't qualify to just write a check.
Yeah.
To their Roth because they make too much money.
Exactly.
But there is a backdoor way to make the Roth, which is I can just contribute to an after-tax IRA. Anybody can do that. Jeff Bezos, Elon Musk, they all can do the $8,000 or $7,500 and just do a regular after-tax IRA.
Yep.
Because that money was already taxed, the very next day I can then just convert it to a Roth. And the Roth conversion, because the money was already taxed, will not trigger an additional tax. But there's another way to do a conversion the mega backdoor. And these are primarily done through work accounts at work. So a lot of these employer plans, in addition to the 401(k), they'll have a sleeve, they'll let you put after-tax money in the plans. And so let's say I take $10,000 per year the next 3, 4 years, and I put it into my plan. Into year 5, I have $50,000 into this after-tax bucket in my plan. Yeah, I then can just convert that money to Roth.
Yep.
It's $50,000 at one time, but it's after-tax money. So no additional income to me. But this is another way to circumvent the rules somewhat.
Yep.
And get a lot more money in a tax-free account.
So a lot of times that's called after-tax contribution. It may not be called mega backdoor Roth or whatever.
I'm pretty sure it's like, yeah, yeah.
So that's the thing is like a lot of times we hear these terms thrown out, but A lot of times that's what helps to work with someone who's a professional to kind of walk you through how exactly to do these things, because it's not immediately obvious.
