What is the “Mega Backdoor Roth” strategy and can I execute it with Rocket Dollar?

You can execute the Mega Backdoor Roth conversion strategy with Rocket Dollar in the Self-Directed Solo 401(k). It is a strategy to acquire as many Roth Dollars as possible.

The Full Story

The “Mega Backdoor Roth” is a strategy to put as many Roth dollars as possible in your Rocket Dollar Self-Directed Solo 401(k). The Self-Directed Solo 401(k) account holder would need to open a new trust bank account for “after-tax contributions.” Section 415(c)(1)(A) limits total contributions to Self-Directed Solo 401(k) plans, to learn more about contribution limits please click here. The limit for after-tax contributions in a Self-Directed Solo 401(k) is the difference between the amount already contributed by the employee and the employer, and the Section 415 limit. The Self-Directed Solo 401(k) account owner must have enough self-employed income to make the after-tax contribution. All amounts contributed to a Self-Directed Solo 401(k), employee salary deferral, profit-sharing contributions, and voluntary after-tax contributions are eligible for conversion to the Self-Directed Solo Roth 401(k) via an In-Plan conversion or conversion to a Roth IRA.

1. The Self-Directed Solo 401(k) account holder would need to open an additional trust bank account for the In-Plan Conversion; you could nickname the new account “In-Plan Conversion 2020”.
2. The conversion will take place when the account holder has moved funds from the “After-tax Contributions” trust bank account to the “In-Plan Conversion 2020” trust bank account. The account owner should open a new account for the In-Plan Conversion for each year the account owner processes an In-Plan conversion. Roth contributions typically need to be held for at least five years, so tracking conversions in separate accounts makes it easy.
3. Alternatively, to streamline the process, your after-tax contributions may also be rolled over to a Roth IRA, including a Rocket Dollar Self-Directed Roth IRA. Earnings on after-tax contributions are taxed at ordinary income rates, so it is best to conduct the In-Plan conversion before any gains are realized from the after-tax account. Any converted amount and any gains need to be reported to the IRS with 1099. Rocket Dollar can assist with the 1099 filing.

Note that Rocket Dollar's typical clients are investing in alternative assets, which is why we use trust bank accounts. The bank account gives the client “checkbook control” of the Self-Directed Solo 401(k), making it easy to invest in alternative assets such as real estate and private companies.

Pricing

Rocket Dollar customers can execute the MegaRoth Strategy from our Silver account ($360 and $20 a month) or our Gold Account, ($600 and $30 a month) but the Silver account is completely self-service. All transactions and tax filings must be done without Rocket Dollar guidance. 

In our Gold account, Rocket Dollar offers basic guidance on how to complete MegaRoth and After-tax moments, getting the dollars into Roth accounts, and filing of the 1099 R document that signifies a distribution and then moved into a Roth account, which has tax implications. 

Rocket Dollar is not a tax advisor. All tax planning, contribution levels, what you pay yourself, and tax decisions made for the Mega-Roth Strategy are the responsibility of the customer or a CPA. 

This is not tax advice and is for educational purposes only. Please consult with your CPA or tax professional on how to correctly plan your taxes for retirement.

See our 401(k) Plan