Absolutely absurdly, there is no income limit to do a post-tax contribution to a non-roth-IRA, and then do an IRA to Roth-IRA conversion.
With no income limit you can:
- $6,000 post-tax dollars contribution to IRA, then do a Roth Conversion and file a IRS8606.
This is a Backdoor Roth Contribution
- $19,500 pre-tax dollars contribution to 401k.
- $xxxx company matching dollars to 401k.
- ($56,000 - $19,500 - $xxxx company match) contribution to After Tax 401k, then 401k to Roth 401k conversion
This is a Mega Backdoor Roth Contribution
- HSA $3,600
- The money converted into the Roth IRA (the $6,000/year) you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.
- The pre-tax 401k dollars (yours & matched) you did not pay tax on the principle going in, so you are taxed on the principle and capital gains coming out
- The after tax 401k contribution, converted to Roth 401k, you paid tax on the principle going in, and are not taxed on it nor on capital gains coming out.
- The HSA you did not pay tax on the principle going in, you are not taxed on capital gains or principle going out, as long as it is for qualified medical expenses.
- Do not get tricked into rolling over old employer 401k plans to a traditional (non-Roth) IRA. If you do this, there are very complex tax implications when doing backdoor Roth contributions. If you have an existing Traditional (non-Roth) IRA, do lots of reading or buy a couple hours of time from a "Fiduciary Financial Advisor". Do not ever trust a "Financial Advisor" under any circumstances. They do not have your best interest in mind, they have their commission in mind. Fiduciary Financial Advisors don't make a commission from your decisions. Make sure that if you go this route, you find someone who only does Fiduciary advising (and doesn't split time).
- You should carefully evaluate timing on doing a 401k to Roth 401k conversion of your withheld earnings and company contributions. If you have a year that you have lower income (back to school, travel, year off), you should probably do the conversion then. The money will be taxed as ordinary income, but then treated as Roth dollars coming out.
- Beware of employer provided retirement plans with high expense ratios. Anything over about 0.30% is a ripoff and you are wasting money. You have to dig deep into the fund information to find the expense ratio.
- Shockingly, many default investments are target-date plans, and they charge outrageous expense ratios, I have seen as high as 0.90%. Compounded over 30 years this will cost you a literal fortune.
If you are a high earner with no health issues, you should be saving $65,600 per year in the above tax advantaged strategies.
Look up the BogleHeads wiki and guide for where to invest the money (Total Market LOW cost, unmanaged mutual funds).
This is not financial advice, hire your own fiduciary financial advisor
Do you have to know if I can convert my SEP into an individual 401k?
It does appear you can roll a SEP-IRA over to a "Qualified (pre-tax) Plan" which footnote 1 indicates includes 401K.
How much do you have in the SEP currently? You could roll $6,000 of it per year over into a Roth IRA (held at Vanguard for example).
Remember, make sure not to end up with money in a traditional IRA, or the tax situation for backdoor contributions becomes much more complex.
Do you have more information on what we should be looking for here? Is the backdoor roth you're referring to different from 401(k) plan sponsored mega backdoor roth?
Backdoor Roth: Contribute $6,000 in after-tax dollars to IRA, Immediately convert IRA --> Roth IRA. File Form 8606.
Mega Backdoor Roth: Contribute a total of ($56,00 - ($19,500 + Employer Match)) as After Tax contributions to a 401K. Convert those funds to a Roth 401k.
Another detail, you may see discussion about avoiding the "Step Doctrine" for backdoor Roth contributions. This is no longer required as the IRS has blessed Back Door contributions, after an obscure footnote in a 2018 congressional report.
- Footnote Commentary: https://www.forbes.com/sites/ashleaebeling/2018/01/22/congre...
- IRS Explicitly Acknowledges: https://www.napa-net.org/news-info/daily-news/case-week-de-v...
- More: https://www.fa-mag.com/news/irs-finally-says-back-door-roth-...
For best results, people (especially young people) should do their own homework and know their own risk tolerance and financial goals. Putting thousands of dollars towards retirement won't help you if what you really needed was to pay off your credit card, or to set aside money for your child's college, etc. etc.
If you have any unsecured debt (college, credit cards, vehicle) I would strongly suggest paying it off completely before doing any retirement savings.
If you have or plan to have kids, you need to investigate 529 college savings plans and determine the best mix for you of retirement versus 529 savings.
Getting into other uses for money such as founding your own startup (given we’re on a Y-Combinator website), I’d suggest thinking long and hard about your level of risk tolerance. If you’re happy with the risk, go for it! If you’d be happier knowing your retirement is completely secured from some years of high earning and high retirement savings, go for that.
A big key to retirement savings is really deeply understanding just how big the impact of compound interest is. Go pull up a compound interest calculator, graph a curve, something conservative say 7% growth rate over 20 years. Then do it over 40 years. The difference is amazing.
All this tax advantaged retirement savings is an almost entirely shadow-world when it comes to compensation. In tech places like http://levels.fyi has done amazing at leveling the playing field, but something small like an employer offering after-tax 401k, or only having horrible high fee fund options, makes a significant difference over the years.
Can you use a throwaway and name some names of employers that you know offer the after-tax-401k-to-personal-Roth option?
See this => https://www.investopedia.com/ask/answers/07/401(k)_ira.asp
You're looking for the section called "Deductibility of IRA Contributions If You Also Have an Employer Plan (2021)".
For your situation, a better move would be for you to do a Roth Conversion of the money in your traditional-IRA to move it to Roth IRA dollars. You do this with your broker, and then file form 8606 with the IRS.
The $6,000 "Roth Backdoor" is indeed with post-tax dollars. This is intended. There are significant benefits to having the majority of your retirement savings in a Roth, including no minimum distributions, and the ability to withdraw funds for unqualified reasons 5 years after your last contribution.
"post-tax" is the important bit!
You then do a IRA to Roth IRA conversion with your retirement plan provider (Vanguard, Fidelity, etc).
Then you file IRS form 8606 to report two things:
- Nondeductible contributions you made to traditional IRAs.
- Conversions from traditional IRAs to Roth IRAs.