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Understanding The Mega Backdoor Roth IRA: A Financial Game-changer for Raytheon Employees

Updated: Dec 19, 2023

As an employee at Raytheon, you are likely focused on engineering solutions to protect and secure our nation. However, it's also critical to consider your financial solutions to secure your future. One unique financial strategy that has emerged recently is the Mega Backdoor Roth IRA. For higher-income individuals or those who've been with the company, this plan could offer an excellent opportunity to save more for retirement.

Unpacking the Mega Backdoor Roth IRA

In essence, the Mega Backdoor Roth IRA is a financial planning strategy that leverages your 401k plan. Besides pre-tax and Roth contributions, a third contribution type exists - after-tax contributions. You can deposit money into this bucket post-tax, which the IRS salary deferral limit doesn't restrict. This allows higher-income employees to save more than just the traditional 401k limits.

This strategy becomes especially powerful if your employer allows in-service distributions. With this provision, you can fund the after-tax portion of your 401k and then roll that amount directly into your Roth IRA annually. This way, instead of being limited to a $6,500 or $7,500 Roth IRA contribution, you could potentially contribute up to $30,000 or $35,000 annually, but that amount depends on a number of factors that may be unique to you.

A Word of Caution

This strategy is not without its considerations. First, be aware of the annual limit the government sets for total contributions to employer plans. For instance, if you are contributing $22,500 in salary deferrals, you'd want to ensure your after-tax contributions plus your employer's match don't exceed the total contribution limit with in the year of 2023 is $66,000. Otherwise, you risk losing the employer's contribution, or potentially incurring tax penalties. An advisor can work with you to assess your current contribution rates and be mindful of other rules to consider.

Secondly, pay attention to your liquidity. It's not beneficial to have large retirement savings but lack readily available cash for current needs, such as buying a vehicle or covering a medical expense. Therefore, always ensure a balanced approach between your tax-free accounts, after-tax investment accounts, and tax-deferred accounts.

Lastly, implementing the Mega Backdoor Roth IRA can be logistically complex. The process of requesting in-service distributions, splitting earnings, and managing regular backdoor Roth contributions can get complicated. A small mistake could result in an unexpected 1099 at the end of the year and potentially lead to taxation. Therefore, if you're considering this strategy, it may be beneficial to seek professional guidance.

Furthermore, this is an area that has been discussed in congress. Tax rules could change in the future, so be sure to stay up to date on rule changes from congress

The Bottom Line

As a Raytheon employee, your benefit package offers a unique opportunity to leverage the Mega Backdoor Roth IRA, and for the right person, this could be a financial game-changer. Yet, as powerful as it can be, it's also complex and needs careful consideration. If you're not confident in navigating this strategy, seeking the assistance of a financial advisor is highly recommended. Like an engineer ensuring a secure defense system, a skilled financial advisor can help secure your financial future.

At Parkmount Financial, we're committed to helping you make the most out of your financial plan. Contact us to discuss your options and let's engineer a thoughtful financial plan together.


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