Mega Roth Conversions – The Basics
If you want to get more money into a Roth IRA than what you can normally do, then you may want to think about doing a large, or mega, Roth conversion with after-tax money. This mega Roth conversion strategy could allow you to add an additional $36,500 into a Roth each year.
You will also want — but don’t necessarily need — the plan to allow for non-hardship in-service withdrawals of those after-tax contributions. This basically means you can roll the money out of the plan without hitting any roadblocks.
- Non-hardship: Withdrawal/Rollover without proving financial need
- In-service: Withdrawal/Rollover before age 59 1/2 and still employed
While this plan doesn’t allow you to withdraw the money while you’re still employed, it works better for those preparing for retirement, or even thinking about switching jobs. Once you separate from your employer, you can immediately roll the money into a Roth IRA.
Now, before you go with this strategy, you’ll want to check with your plan administrator to make sure they’re keeping track of your Roth/traditional 401(k) contributions and an after-tax portion that you’re trying to put away. That is highly important. When you roll that money out, you want to make sure that money is separated. That’s going to be very important when rolling that into the Roth.
Transitioning to a Roth
When you’re ready to roll that money over, it’s just like a traditional rollover into a Roth IRA account. You’ll do the paperwork to roll that money over. When you do that, the check needs to be made payable to your Roth IRA.
Sometimes the receiving accounts would like to have some sort of letter of intent that you might need to sign to roll that money over. Once it goes into the account, that’s the large Roth conversion. It’s a lot more than the typical $5,500 or $6,500 in converting it that you can normally do.
This strategy might not work for everybody because you need to have a lot of pieces in place in order to do it. Not all 401(k)s allow this strategy; when in doubt, ask if your plan accepts after-tax contributions.
And if you miss a step, you could potentially get hit with a large tax bill, especially if you’re rolling out your entire 401(k) and the plan administrator is not keeping tabs on that after-tax portion.
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.