Mega backdoor Roth question

[Anonymous]

I’m self-employed and make about $160,000/year. I have always tried to pay myself as small an income as possible to minimize taxes. The lowest figure I think I could justify to the IRS is $45,000, so that is my current income.

However, this also means that $45,000 is the annual maximum that I can put into my mega backdoor Roth. I could contribute up to $70,000 (the IRS limit) if I were willing to pay myself that amount in salary. Taking a $70,000 salary would mean I would have to pay the 15.3% self-employment tax (Social Security and Medicare) on the additional $25,000 of income.

Is this worth it? In other words, is it worth it to pay an additional $3,825 in taxes each year (.153 x $25,000) in order to be able to get an extra $25,000 annually into a Roth IRA?

Two additional points for consideration. First, this would increase my Social Security payout at retirement. On the other hand, the second consideration is that I don’t believe in bonds, so my income in retirement is likely to be exclusively capital gains/dividends, which will largely be taxed at 0%, thereby negating the value of the Roth IRA and also subjecting myself to the extra rules surrounding retirement accounts.

Thanks in advance.

[Anonymous]

I assume you have a solo 401K. If so, your employee contribution is limited to $23,500 (100% of income) and employer contribution limited to 25% of net income,which would be income less employer portion of payroll taxes and other expenses(say 90%, $144,000/4=$36,000).

You'll end up paying payroll taxes on an additional $99K, about $15K on a Roth contribution of $36,000 (about 42%). Not worth it.