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3 Things 11-25-24

Thing One

High Income Earners Might Consider The Mega Backdoor Roth

Excerpted from bankrate.com

"...A mega backdoor Roth is a strategy that allows individual investors to contribute more to a Roth IRA and/or Roth 401(k) than the standard contribution limits. It can also be beneficial to those who exceed the income limits for a Roth IRA.

You can only contribute to a Roth IRA if your income is less than $161,000 in 2024 ($240,000 if married and filing jointly). Those with incomes exceeding those levels cannot normally contribute anything to a Roth IRA. However, with a mega backdoor Roth, it may be possible for those with high incomes to contribute to a Roth IRA and/or Roth 401(k).

How a mega backdoor Roth works

If you are interested in pursuing the mega backdoor Roth strategy, you should first understand how the process works. Here’s a quick overview of the basic steps:

1. Pre-tax contributions: The individual must make the maximum pre-tax contribution to their 401(k) for the year. For 2024, the maximum pre-tax contribution is $23,000 for all accounts ($30,500 for those aged 50 and over).

2. After-tax contributions: Once the individual has reached their maximum pre-tax contribution, they can make additional after-tax contributions up to the total 401(k) limit for the year. For 2024, this limit is $69,000 or $76,500 for those aged 50 and over. These limits include the individual’s contributions, employer contributions and after-tax contributions.

3. Roth conversion: The final step is to roll the after-tax contributions into a Roth IRA or convert them into a Roth 401(k) if the plan allows. This lets the money in the account not only grow tax-free but also be withdrawn tax-free in retirement. Remember that conversions could trigger a tax event, so it’s best to consult with a tax professional about your specific situation.

The ability to use this strategy has some caveats. For example, your plan must allow in-service distributions or conversions to a Roth account. In-service distributions (also known as withdrawals) are those made while still employed.

If you want to convert your after-tax contributions into a Roth 401(k) but are unsure whether your plan allows this, contact your HR department or plan administrator. You should also consult with a financial advisor or tax professional before implementing this or any other investment strategy..."

Footnote 1: Some people who can’t afford to save additional after-tax money routinely, but do max out their main 401k contributions, direct their annual bonus checks to the Mega Backdoor Roth.

Footnote 2: A reader of a similar story about the Mega Backdoor Roth on marketwatch.com had the following cheery advice for people that who don’t make enough money to save such vast amounts:

“In this country you don't need much money to retire. You just have to plan your life. I'm 76, retired at 62 with only $20,000 in the bank. I'm now on a fixed income and make about $2,500 a month from Social Security and my retirement check, about a half of what most American workers make. I realized I don't need much to enjoy life. I don't drink or smoke except for a "doobie" once in a while, but I do love the sativa edibles. My expenses are less than $1,300 a month. So I have $1,200 left over, usually $200 is for fun and the rest, I keep putting in the bank. My bank account is now near $90,000. I live within two blocks of Walmart and eight restaurants, so I only burn about $20 worth of gas a month. Also my VA approved doctor's office is less than two blocks away. I served my country during Vietnam so I have no medical bills because I use the VA and Medicare. The trick is planning your life and managing your money.



Thing Two

Everybody Should Have And Benefit From An HSA (But Not Everybody Can)

First, let’s define what an HSA is:

It is essentially a savings account that lets you set aside pre-tax money to pay for qualified medical expenses such as deductibles, copayments, coinsurance, and other expenses. You — not your employer or insurance company — own and control the money in your HSA. Your control is established through a custodian like a bank or a broker like Bank of America or Fidelity. Once your funds are in the account you can invest them in securities (stocks, bonds, mutual funds, etc.).

As far as qualifying for an HSA, you are eligible if:

· You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.

· You have no other health coverage except what is permitted under Other health coverage.

· You aren’t enrolled in Medicare (or Tri-care or Medicaid)

· You can’t be claimed as a dependent on someone else’s 2024 tax return.

As for the benefits, per IRS publication p969, here they are:

· You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).

· Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

· The contributions remain in your account until you use them.

· The interest or other earnings on the assets in the account are tax-free.

· Distributions may be tax-free if you pay qualified medical expenses. See Qualified medical expenses, later.

· An HSA is “portable.” It stays with you if you change employers or leave the workforce.

Now, do you see why everyone should have and benefit from one? There is one significant item to be aware of though and that is, even if your insurance plan has a high deductible, which is defined as being at least $1400 for an individual and $2800 for a family, there may be specific attributes in your plan that make you ineligible to make qualified contributions to an HSA. In fact, many HDHPs (by definition) are HSA-ineligible for one technical reason or another. To be certain of your own plan, you should call or email your insurance provider and ask specifically if it is HSA-qualified. If it is, you should seriously consider opening and funding one. And if it is not, you should keep this all-in mind when open enrollment as you navigate open enrollment which runs through January 15th.



Thing Three

Just A Thought

"Beware of no man more than of yourself; we carry our worst enemies within us." - Charles Spurgeon

Comments


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