After reading this article on the Ultimate Guide to Back Door Roth IRAs & then reading this article on the 5 Year Rule for Roth IRAs, you may be salivating and can’t wait to contribute to a Roth IRA!
You say to yourself…. “This is perfect! Tax-free growth and tax-free withdrawals. I don’t care about the 5 year rule--- I have plenty more in the bank. I want more money in Roth IRAs!!!”
However, you see my friend--- there’s a problem.
THERE’S A LIMIT to what you can contribute outright to a Roth.
That’s right--- the limit is based on your age.
If you are below 50 years old, it doesn’t matter whether you go through the ‘front door’ or the ‘back door’- the most you can contribute is $6,000.
If you’re 50 or older, it’s $7,000 (assuming you’re still working and having earned income).
That’s it!!
……….
Or is it?
………
Now, I do have a lot of good info in the Ultimate Guide to Back Door Roth IRAs on this concept--- but it’s worth repeating and reviewing over.
What is the Super Back Door Roth IRA?
It’s pretty simple really -------- The SUPER Back Door Roth allows you to put MORE money in a Roth IRA. Possibly, it could allow you to put even more than the ‘normal’ way.
Basically, here’s what happens…
- There is a TOTAL limit of $56,000 that you can put into defined contributions plans like 401ks/403bs/ 457 DCs
- You have a 401k or similar kind of employer sponsored plan (403b/ 457 DC)
- You put some $ into it as an employee contribution and get a tax deduction for doing so (assuming it’s pre-tax $). Maximum of $19,000 if under 50 y/o in 2019, $25,000 if over 50 y/o. You get taxed one day when you pull it out.
- The employer puts some $ into it as an employer match and/or for profit sharing and they get a tax deduction for doing so. You get taxed one day when you pull it out.
- Here’s where it gets interesting… you have room to put in ADDITIONAL $ that are NOT tax deductible and then you immediately convert those $ to Roth.
Let me lay out how this could work in a few scenarios.
Scenario# 1: Orthopedic Surgeon Making $500k, 45 Years Old
Client Salary- $500k
Employee Salary Deferral- $19k
Employer Match- $25k
Employer Profit Sharing- $12k
Total-- $56,000
The orthopedic surgeon CANNOT put anything in AFTER-TAX contributions because they have already met the maximum defined contribution limit between employee and employer match.
The SUPER BACK DOOR ROTH cannot be done here!
Let’s consider a different scenario…
Scenario# 2: Small Business Owner Making $200k, 50 Years Old
Client Salary- $100k , Pass Through $100k
Employee Salary Deferral- $19k
Employer Match- $5k
Employer Profit Sharing- NONE
Total--- $24,000
In this scenario, the small business owner COULD put in AFTER-TAX contributions up to $32,000 (calculated as $56,000- $24,000) because they have NOT met the maximum defined contribution limit ($56k).
This means that they COULD do a SUPER BACK DOOR ROTH up to $32,000!!!!!
They don’t have to do that much. They could do nothing…. They could do $5,000 or $6,000 or $10,000 or heck… they could max it could at $32,000.
When doesn’t it work??? I refer you to the Ultimate Guide on Back Door Roths. Here’s what I wrote….
When The Super Back Door Roth IRA DOESN'T Work
Scenario# 1: The typical problem here is that the plan sponsor has to allow it. If you are self-employed, easy peasy, lemon squeezy! You sign off on a few documents and get it done.
If you are not self-employed, you may need to get some strings pulled in your HR department. It's a really easy change.... just a simple box they have to check off.
To be fair, this means more record-keeping and more administration- thus, there may be additional costs annually to the plan/employer for making this change. The more employees, the more difficult this will be to pull off.
I find that the larger the company, the less likely they will be to allow it.
Scenario# 2: Another use case where this may NOT work is where you are a highly compensated employee and you are already maximizing the plan limits.
For example, I have an orthopedic surgeon client who is making $500k per year.
He is maximizing his employee deferral at $18k/year and the employer has profit sharing of $38k/year. They are already putting in $56k and are hitting the plan limits.
Thus, there is no room for any additional after-tax contributions.
Final Thoughts
And there you have it friends….
What is The Super Back Door Roth IRA?
It is an easy way to get MORE money into Roth IRAs. You may even be able to put TENS of thousands of dollars into a Super Back Door Roth.
That’s an easy way to have money grow tax free and come out tax free in retirement.
However, be very aware of whether or not you can even do it! Be aware of the plan limits and make sure not to exceed the annual defined contribution limits.
That being said--- what a wonderful way to sock away for retirement. If you have the ability to save and you have the desire to sock away even more money for retirement, definitely keep this plan in consideration.
It might be a game changer for you!!
Is your head spinning? Feeling confused? Have additional questions? Send me an e-mail at dave@daviddenniston.com
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.
Please consult with your accountant or tax advisor for specific guidance.