Everything About Roth IRA

What is IRA? What is Traditional IRA? What is Roth IRA? What is Backdoor Roth IRA? What is Mega Backdoor Roth IRA?

IRA 

Individual Retirement Account. 

In 2020, the annual individual contribution is $6,000.

Traditional IRA

Contributions are tax-deductible. Withdrawals are taxable. 

If you don’t have a retirement account at work (e.g. 401(k)), the full contribution is tax-deductible, but if you have a retirement account at work and your income is more than $124,000 (for 2020) for married filing jointly, your contributions are not tax-deductible. 

Roth IRA

Contributions are not tax-deductible. Withdrawals are not taxable. 

You can contribute to a Roth IRA only if your income is less than $206,000 (for 2020) for married filing jointly.  

Backdoor Roth IRA

Backdoor Roth IRA is a legal workaround for a high-income family to contribute to a Roth IRA. The process is to contribute after-tax money to your traditional IRA, and then transfer the fund to your Roth IRA. 

Mega Backdoor Roth IRA

The 401(k) employee contribution limitation is $19,500 for 2020, and total limitation including both employer and employer is $57,000 for 2020. Some 401(k) accounts allow employees to contribute more after-tax money beyond the employee limitation, but subject to the total limitation. Then you can convert this money into a Roth account. This is called Mega Backdoor Roth IRA, or 401(k) in-plan Roth conversion.

References

• White Coat Investor: Backdoor Roth IRA Ultimate Guide and Tutorial
• White Coat Investor: The Mega Backdoor Roth IRA