馃攳
How to set up a mega backdoor Roth 401k | Vanguard - YouTube
Channel: Uprise - Finance For Young Professionals
[0]
this is a video for all my people out
[2]
there who also think that tax advantage
[4]
retirement savings accounts are some of
[6]
the most exciting things on planet earth
[10]
i think i probably just came across as
[12]
like that really boring person at the
[15]
holiday party but i mean seriously like
[18]
getting a really good deal paying less
[19]
in taxes over a lifetime who wouldn't
[22]
want that hey guys jessica here today i
[24]
wanted to talk about mega backdoor roths
[27]
this is a seriously incredible personal
[30]
finance optimization where if you
[32]
qualify you have the opportunity to
[34]
contribute up to 38 500 into your 401k
[39]
even after you maxed out your normal
[41]
401k
[42]
that's a lot of tax savings the reason i
[44]
wanted to get this video out super
[45]
quickly is because there's been a lot of
[47]
talk in congress about squashing this
[49]
retirement savings option in fact it's
[52]
already passed the house and is moving
[53]
to the senate
[55]
if it passes then mega backdoor roths
[58]
will no longer be allowed beginning
[59]
january 1st 2022 no idea if this is
[62]
going to pass or not like i am
[64]
definitely not an expert in the mess
[66]
that is congress
[68]
but if you do have extra money that you
[70]
could be putting in
[71]
20401k before december 31st of this year
[74]
then definitely look into taking
[75]
advantage of this while it's still
[77]
available and if there's any news on
[79]
this you know after i filmed this i'll
[81]
definitely be sure to let everybody know
[82]
by updating the description below okay
[85]
so what i wanted to do today is i wanted
[87]
to show you guys step by step how to do
[89]
a mega backdoor roth i honestly think
[92]
that's probably the most daunting thing
[93]
about them the name mega backdoor roth
[96]
also doesn't help much
[98]
and also before jumping into that before
[100]
sharing my screen also just really
[101]
quickly cover what it is and how to
[104]
figure out you know whether or not it
[105]
makes sense for you let's do it the
[107]
point of this video is actually super
[109]
simple if you work for an employer where
[111]
this is an option and you have extra
[113]
money that you can spare to put into it
[115]
then you should definitely do it so
[116]
backing up a bit let me give you some
[118]
context first
[119]
let's ignore mega back door ross for a
[121]
second and just talk about regular 401ks
[124]
401ks are tax advantaged retirement
[127]
accounts that are offered by your
[129]
employer and every single year there's a
[132]
limit to how much you can contribute
[134]
into your 401k this limit is set by the
[136]
irs it has nothing to do with your
[138]
employers this limit is the same for
[140]
everybody and for 2021 this limit is 19
[143]
500
[144]
and what mega backdoor roths allow you
[146]
to do is that even after you hit that 19
[149]
500 limit you can contribute additional
[151]
money on top of it into your tax
[153]
advantage retirement account so yeah
[155]
basically this video is for super savers
[158]
like the people who've already hit 19
[160]
500 in their 401k and have even more
[162]
money to contribute to retirement
[164]
that said i know it sounds like a lot of
[166]
money but there are a lot of cases where
[168]
this might make sense so for example say
[171]
you're working at a big company today
[172]
you have access to an employer who gives
[174]
you 401ks it's all wonderful but you're
[177]
thinking hey maybe in the future you
[179]
kind of want to go and join a smaller
[181]
company or maybe you want to go and
[182]
start your own thing whatever it is if
[186]
you think that maybe there's a chance
[187]
that these amazing employer benefits are
[189]
going away in the future then maybe you
[191]
want to try to like front load as much
[192]
of your retirement savings as you can
[194]
while you have access to those benefits
[197]
or maybe flip side of this maybe you
[199]
slacked off on saving for retirement in
[201]
the first few years after school and now
[203]
you're like way behind in your
[204]
retirement savings that's another good
[206]
reason to sort of like catch up and the
[208]
sooner you contribute to your retirement
[210]
account the longer a period of time you
[212]
have to let compounding work its magic
[214]
before retirement as you probably have
[216]
guessed based on what i was saying about
[217]
employer benefits you can only do this
[220]
if your employer offers a 401k in the
[222]
first place and on top of that they need
[224]
to explicitly say that they offer mega
[227]
backdoor ross as a benefit as well so if
[230]
that's not you that's okay you feel free
[233]
to navigate away we've got a bunch of
[234]
other videos about personal finance
[236]
optimizations that you could do
[237]
but if it is you
[239]
you're a lucky duck
[241]
anyway how to set up a mega back door
[243]
roth so i'm going to switch to screen
[244]
share in a second but before i do that
[246]
i'm just like really high level four
[248]
steps in terms of getting this done the
[250]
first step is to make sure that you have
[252]
maxed out your 401k already so double
[254]
check that the second thing is you have
[256]
to calculate what your limit is like how
[259]
much additional you're allowed to put in
[261]
i mentioned up to 38 500 but that exact
[264]
number is going to depend on things like
[266]
company match and stuff like that so
[268]
i'll show you exactly how to calculate
[269]
that the third thing is then to set up
[272]
automatic roth conversions in your 401k
[275]
account and then the fourth thing is to
[277]
go into your payroll and change the
[278]
contributions to put more money in all
[280]
right let me switch over to my computer
[282]
okay so the first thing that you're
[283]
gonna do is log into your 401k system uh
[286]
in this case it's vanguard uh basically
[288]
i've helped a friend um put money set up
[291]
this mega backdoor roth and he was super
[293]
nice to be able to uh let me share a lot
[295]
of this or record a lot of the process
[297]
to share with you guys so basically when
[298]
you log into vanguard 401k this is kind
[302]
of the first screen that you should see
[303]
and this is actually a new user
[304]
interface for vanguard uh but in case
[307]
you scroll down here
[309]
and you can see
[310]
that they make it super easy to set up
[312]
the mega backdoor roth this is talking
[315]
about saving beyond the 408k limit which
[317]
is exactly what we're trying to do here
[319]
and so it talks a little bit about how
[320]
to do that if you keep scrolling down
[323]
you can see down here that they make it
[325]
super easy to sign up
[327]
right here you can click that button
[329]
to get started but we're not going to do
[331]
that just yet the first step is actually
[333]
as i mentioned to double check
[336]
the amount that you've contributed to
[337]
your 401k so far this year as well as um
[340]
check what is the maximum amount that
[342]
you could put into a mega backdoor roth
[344]
um so we're going to calculate those
[345]
numbers first so to do that you go to
[348]
manage my money up here
[350]
and then uh you click contributions
[354]
and then you want to scroll down here to
[356]
this place where it says this is how
[358]
much you've contributed this year
[361]
all right so the first thing you want to
[362]
check is to see that hey your
[364]
contributions are at 19 500 or pretty
[368]
close to it um in this case um my phone
[370]
is pretty close to it
[372]
and then
[373]
so you can see that that's how much you
[375]
have put in and then this like light
[377]
blue bar is how much the employer has
[379]
put in because a lot of companies offer
[381]
this thing called employer match where
[383]
hey you put in a certain amount and
[384]
they'll give you um either one for one
[387]
or 50 or whatever it is in this case um
[390]
the employer is super generous um this
[392]
employer matches uh 50 cents for every
[395]
dollar that you put in which means that
[397]
if you put in 19 500 it's like let me do
[400]
the math 19 500 uh they will put in 9750
[405]
uh which is like super generous that's
[406]
like a lot of free money um
[409]
in any case uh
[411]
so once you know that um you could like
[413]
if you're really close and maybe you
[415]
don't you don't need to worry about
[416]
hitting the the full amount but um if
[418]
you're at 19.5 that's where you should
[420]
be
[421]
the next thing that you want to figure
[423]
out is like what is the maximum that the
[425]
irs allows you to put into your mega
[427]
backdoor roth
[429]
and
[429]
that number is
[431]
38500 the irs limit minus any employer
[435]
contributions so this number
[438]
um so in theory you could take 38 500
[441]
minus this number to get to the maximum
[443]
that you could put in however uh because
[446]
like there's still another couple of pay
[448]
cycles not sure if um
[451]
if there's another uh deduction that's
[454]
already going to come out in the next
[455]
paycheck i'm just going to play it safe
[457]
basically and just assume that this uh
[460]
that my friend already put in the
[461]
maximum so as i mentioned it was 19500
[464]
divided by two that's the maximum that
[467]
this employer will match so nine seven
[468]
fifty
[470]
okay so we take thirty eight five
[472]
hundred minus nine seven fifty that gets
[475]
us to twenty eight seven fifty twenty
[476]
eight seven 750 is the maximum that can
[479]
go into my mega backdoor roth uh
[482]
probably most people are gonna put you
[484]
know amount of money that's less than
[486]
this number uh which is totally fine but
[488]
it's still really important to just know
[490]
what your limit is you don't want to
[493]
accidentally contribute over this limit
[495]
because
[496]
it's not the end of the world
[498]
it's just a bit of a headache if you do
[500]
over contribute you have to pull the
[502]
money out if you
[504]
fail to catch it you might have to pay
[506]
some penalties this kind of stuff and so
[508]
better not to deal with that better to
[510]
stay underneath the limit so make sure
[512]
you calculate the limit um and keep your
[513]
contribution below that okay so in this
[515]
case 2750 is the limit
[520]
so we're going to scroll down here um to
[522]
sign up today uh and this is where you
[524]
sign up for the mega backdoor roth
[526]
basically and this is where the magic is
[528]
or you know you know why i said it was
[530]
super easy is that they make that
[532]
conversion to roth
[534]
for you automatically you don't have to
[536]
do anything any sort of after tax
[538]
contributions that you make will
[540]
automatically be a mega backdoor raw so
[542]
you hit
[543]
down here set up my roth conversions hit
[545]
this button
[547]
and then it pulls up um
[550]
explanation as to what the mega backdoor
[552]
roth is how it works make sure you know
[555]
read through it um then scroll down and
[558]
uh make sure that you acknowledge this
[560]
and then hit agree
[564]
and that's pretty much it uh the next
[565]
step is to go then to the contributions
[569]
page and to set up those contributions
[571]
now into your mega backdoor raw
[573]
so you hit contributions just from that
[576]
link right there so it'll take you to
[578]
this page where you can see all of your
[580]
current payroll deductions um and here
[583]
on the left is all of your current
[586]
contributions so right now my friend is
[588]
currently contributing 14 of his
[589]
paycheck um into his traditional 401k uh
[593]
and then going forward um he uh scaled
[597]
that down to one percent remember he
[598]
still had a little bit left um before he
[601]
hit that 19500
[603]
and then he put uh 99
[606]
into this after tax 401k so you're
[608]
looking for
[609]
where it says after tax 401k
[612]
that's the money that's going to go into
[614]
the mega backdoor roth um so this is
[616]
this is what you want to um put money
[619]
into uh
[620]
you can set it as either percent or
[623]
dollar value uh whichever one makes
[625]
sense for you in in his case like
[628]
right the maximum was like twenty eight
[630]
thousand seven fifty uh his paycheck
[632]
wasn't even gonna get close to that so
[634]
he was like i'm just gonna put uh the
[636]
entire paycheck uh into the after tax
[639]
especially because there's only one to
[641]
two pay cycles left before the end of
[643]
the year and so for him he was totally
[645]
fine just putting the rest of his
[647]
paychecks and like living off of savings
[650]
um
[651]
so that's what he decided to do here uh
[653]
but as i mentioned you can you can
[654]
change it to a dollar value if that
[656]
would be easier for you
[657]
by the way if you scroll down here you
[659]
can see that actually there's um bonus
[662]
it says bonus pre-tax 401k bonus roth
[664]
401k this is for if you get an annual
[667]
bonus um you can contribute that money
[670]
into the 401k as well um so if you if
[672]
you do get one then feel free to
[674]
contribute to this bonus after tax 401k
[676]
as well
[678]
then you hit continue
[681]
um this was a bit of a i guess random
[683]
screen but it's basically trying to
[685]
encourage people to contribute more to
[687]
retirement which if you're watching this
[689]
video and following along um it's not a
[692]
problem for you probably uh but you can
[695]
basically set it up so that um
[698]
you can keep increasing your uh paycheck
[700]
deduction year on year uh the thing is
[703]
like i want to say that this screen
[705]
doesn't matter so much because you've
[706]
now
[707]
changed your um
[710]
your deductions like quite drastically
[711]
so probably in january you want to come
[713]
back in here and just review all of
[716]
those payroll deductions that we
[717]
previously did
[718]
rather than relying on on any sort of
[720]
automation here
[722]
any case uh you can hit continue
[725]
and then review and submit and so just
[727]
making sure that previously it was 14
[729]
now this has gone down to one and then
[730]
the remaining 99 right in the after tax
[733]
401k so so to confirm right like you
[736]
want money going into the after tax 401k
[738]
or the bonus after tax 401k and try to
[741]
put as much as you can right now because
[743]
um there aren't that many pay cycles
[745]
left before the end of the year
[747]
all right um and then
[750]
make sure everything looks okay click
[751]
submit and that's it
[753]
and that's it i hope that was a lot
[755]
easier than you guys expected uh just a
[757]
quick call out also that mega back door
[759]
roth savings are going into roth
[761]
accounts as you can probably guess by
[763]
the name
[764]
we did a separate video that talks about
[766]
the differences between roth and
[768]
traditional what the tax benefit
[769]
differences are and so you could
[770]
definitely check out that video up here
[772]
also any other questions about mega
[773]
backdoor roths or retirement savings in
[776]
general feel free to let us know in the
[777]
comments also if you'd like more support
[779]
with personal finance you know make sure
[781]
to sign up for uprise at the links in
[782]
description below as well we design wall
[785]
street level personalized financial
[786]
plans completely and 100 for free so if
[790]
you have questions about retirement
[791]
savings about employer benefits about
[793]
budgeting whatever it is we're happy to
[795]
help and on average we've put 100k in
[798]
net worth back into people's pockets
[800]
other than that if you'd like to see
[801]
more videos like this one please give us
[803]
a thumbs up hit that subscribe button
[805]
and click the bell for notifications see
[807]
you guys next time
Most Recent Videos:
You can go back to the homepage right here: Homepage