Welcome to EWA’s Finlit Podcast. EWA is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time in welcome, everybody, today’s Finlet podcast. I’m joined here by Jameson Smith of VWA, and we are going to talk in detail about the Mega backdoor Roth. So first and foremost, we wanted to start out by saying the mega backdoor Roth is definitely a strategy for people with high cash flow and the available resources to go above maxing out a 401 in traditional sense, and then also doing a regular Roth IRA as well.
So the reason this exists is in 2014, there was a tax code passed called 2014 54. And so in a 401, there is something called after tax contributions, and a mega backdoor Roth is specifically talking about those after tax contributions to get the extra money in and then get it converted to a Roth. So just to start to our audience in general, the order kind of hierarchy of which to consider if a mega back to a Roth is a fit for you would be one. Make sure you’re first getting enough into the get the free money available. So, for example, if you put in 5% and your company matches 5%, that’s the first thing you should do. The second thing you should do is if you have no aggregation or if your income allows, you should max out what’s called a Roth IRA.
So a Roth IRA and a Roth 401K are two separate universes. An IRA just stands for an individual retirement account. A 401K is tied to your employer, same thing as a 403 B that’s also tied to your employer. And then if you’re able to put in that free match in the 401K, Max out a Roth IRA. Then it would even say, max out a health savings account. Don’t use that, invest it instead, and keep that as a triple tax free account that rides until your retirement, and use that for health care expenses. And then I’d even put the checklist that you need to have an emergency fund of three to six months available. So once you’ve checked all those boxes, then the question becomes, where should I put my extra money? And that’s going to be goal based.
So obviously, if it’s college planning, we wouldn’t want to put money necessarily in a 401, depending on your age, because there’d be penalties to get it out when your kids are going through college, you need the tuition. But if you are putting resources away towards retirement, this mega backdoor Roth is the most tax efficient thing that exists after those hierarchy of checklists I just described are met. So, James, I know we have a slide to show the difference of someone accumulating this, because typically, where do you see people accumulate money after they hit those checklist? 401K match, Roth IRA, HSA, have that emergency fund. Then we’re going to add a fifth component there where you go back to max out your 401K in the traditional sense.
Speaker 1
So talk to us about where do you typically see people accumulate money once those checklists are fulfilled without knowing what to make? A backdoor office.
Speaker 2
Yeah, it either accumulates in cash, usually, or in a non qualified investment account. It’s kind of the default to kind of out of places to put money if you’re a high income earner and you’re doing all those things. And so, to your point, depending on the goals, if you have shorter term, not short term, but shorter term, pre retirement goals, maybe you want money in the non qualified taxable account. But if the goal is long term financial independence, savings to maximize tax efficiency, then totally agree, this would be the bucket to put money into.
Speaker 1
So, as I describe, what’s the four one five C limit is to set the stage. Can you pull up that slide that shows the difference between a million dollars invested in a taxable account versus a Roth account?
Speaker 2
Yeah, it’s like a $2 million.
Speaker 1
It’s a huge difference. So we’ll actually edit the slide here as we’re talking. Okay, so I think that’s an important point that Jameson brought up, is that the mega backdoor Roth run of assumptions, that you’ve gone through those hierarchy, you’ve checked off those five things off the list, and that the excess money that you are talking about saving is geared towards long term financial independence. Because the money you put inside of this mega back to a Roth, once you reach the age of 59 and a half, assuming that there’s been a five year time lapse between the converted money to the Roth, then the money inside of the Roth, or the converted part into the Roth, all of the contributions you made, all of the growth, everything then distributes out to you tax free.
Speaker 1
And better yet, if you roll it to a Roth IRA is not subject to required minimum distributions. So then you have complete control of your money over what’s called a sequence of return risk, which is absolutely massive. Okay, so before I go through, give us the actual numbers. So this slide is going to appear on the screen if you’re watching this on Spotify, it’s on video if you’re watching this on YouTube.
Speaker 2
So this is example of taking a million dollars of after tax money investing at an 8% per year rate of return over 20 years. So if that’s going inside of a taxable investment account where you’re paying capital gains taxes on the growth, that accumulates to about 2.5 million. Approximately 2.5 million.
Speaker 1
That’s assuming what capital gain tax? Okay. And we just round that up to 24, I believe, right? Yeah.
Speaker 2
And then the second scenario is if that million dollars was put inside of a Roth account and just you didn’t pay tax on any of that growth, it’d be about 4.6 million. It’s like a $2 million difference from paying capital gains taxes to it being tax free.
Speaker 1
Wow, that’s crazy. Okay, so see episode one, because if you have already done the mega back to Roth and you’re accumulating money in a non qualified account, direct indexing is a way to offset a lot of those taxes. So see episode one of our podcasts to talk about direct indexIng.
Speaker 2
But I think episode two, we did the pre tax. There’s another episode we did pre tax versus Roth.
Speaker 1
So that also gives great details on the Roth as well. Okay, let’s really get digging the details of this mega back to a Roth. So there’s something called a 402 G limit. And a 402 G limit is specific to someone’s Social Security number. So, Jameson, give us that. What is a 402 G, and how much can you put into this? Dependent on your age? What’s the breakdown?
Speaker 2
This is the standard. When people think about what they’re funding into their 401K, they’re most likely referring to the 402 G limit. So this is your standard salary deferral if you’re under the age of 50, 22,500 per year in 2023, if you’re over the age of 50, you get extra $7,500 catch up contribution. So $30,000 per year. That can either be pretax or Roth if your employer allows it. And you get one of these. So if you have a W two job, and then you have 1099 income, 402 G limit, you can only do one time. So you would do that with the W two job.
Speaker 1
So that brings up a good point. You can have multiple 401 Ks. If I am a W two physician and I have my own consulting or legal work business, I could set up a 401K tied to the 1099. But what you said is so important. The 402 G is only one time. So if I’ve used that at my day job, my W two, my other four hundred and one K, I would have to forego the 402 G limit and just focus on a profit share or after tax contribution. Right. Okay. So I like using the analogy that a 401K is a bucket. So, a common misconception we see is that most people think, like, if you’re under 50, that 22,500 limit is, like the total that can go in, even between what you put in and the match. And that’s just not true.
Speaker 1
The total that can go in. So imagine you have got this bucket, and there are four compartments, just for simplicity, of money that can go in, and that bucket represents the 401K. So if you’re under 50, the total water. And in this analogy, the total money that you can put in that bucket if you’re under 50, is $66,000 a year. So what you just said, the 402 G limit is just the first compartment of that bucket, it’s 22,500, and then there’s a Match component. So let’s say you’re making 200,000 and you get a 5% Match. So the next component would be a Match, which would be $10,000. And then let’s say there’s a profit Sharing component of 5%. So your Company Matches. Does it Match a five? Does profit Sharing of five? So 5% of 200 would be another ten.
Speaker 1
So now we’ve done 22,500, plus gotten a $10,000 Match, plus gotten a $10,000 profit share. So the total that we put in so far between you and your company is 42,500. Well, the total that can go in is 66,000. So, just doing some quick math, that’s 23,500 per year that most people don’t know is still available in a Fourth Compartment that you can fill Water into this thing and get to that full 66,000. And guess what? If you’re over 50, that Bucket goes up to 73,500. There’s an extra $7,500 if you’re over 50 that you can fill in. So it’s either 66,000 total that can go into this Bucket if you’re under 50 or 73,500 total if you’re over 50. So that Fourth compartment is what is referred to as the Mega backdoor Roth. So most people, first of all, don’t know this exists.
Speaker 1
Or sometimes they’ll get after tax confused with Roth. Roth is after tax. But it is way better than after tax if you just leave after tax alone. So the after tax alone, if you just contribute to it and you never convert it to Roth, is actually what I believe is the worst thing in the world. So, James, can you give the reasons why that’s the worst thing in the world?
Speaker 2
Yeah. So the basis, we could come out tax free, and then the growth you.
Speaker 1
Pay income tax on, and that’s income taxes. That’s not capital gain taxes. So, hypothetically, if you’re a doctor and you accumulate a lot of assets and you retire, basically, if you put in a million dollars into after tax, and it’s grown to 2 million when you take it out, first of all, it’s Pro rata, so you can’t say, oh, I want to take just my million out. It’s Pro rata when you take it out. It is subject to required minimum distributions once you turn 73 now, and that full million dollars gets taxed at income rates. So if you’ve accumulated enough assets in your highest tax bracket, again, common misconception is I’ll be in a lower tax bracket.
Speaker 1
Well, if you’ve done a good job accumulating money, because you’re making a good amount of money with dividends, interest, Social Security, RMDs, you’re going to be in a mid to high tax bracket again. So then let’s say you’re paying 35% on that. So I would argue, why would you not, instead of doing that after tax, just put the money into a brokerage account, and then later in life, you can then pay capital gain taxes of 15 or maybe 23.8%. Right. So, again, I was just being to prove a point. It’s not the worst thing in the world, but if you just do after tax, for the sake of doing after a tax, we actually wouldn’t recommend it. We’d recommend a brokerage account over it.
Speaker 1
But in 2014 54, the IRS code states that you are allowed to convert that after tax money into a Roth. And you can actually do this in some plans monthly, you could do this sometimes once a year, sometimes twice a year. And that’s the key. So, in that example, where I put in that extra 23,500 into after tax, I did the 22,500 Roth, $10,000 match, $10,000 profit share. So, first of all, these different buckets, although it’s one statement, they all get tracked differently on the statement, because that first compartment of Roth, when I retire, everything’s tax free. Assuming I’m 59 and a half, those next two components were contributed by employer and they didn’t pay taxes on those. When they put them in, they got a tax deduction and it’s giving those to me as an employee.
Speaker 1
So when I take those out, they’re subject to RMDs and they’re fully taxable at whatever income rate I’m in. So that fourth component, which is actually my money going in after tax, it’s after tax dollars. But let’s say that 23,500 I put in and it doesn’t grow throughout the year, and then at the end of the year, I convert it. I can convert that to a Roth with literally no taxes. And then once it’s in the Roth, then forever moving forward, all of that money is tax free. So let’s just say, hypothetically, that I was lazy and never converted that money. So let’s say I’m 65, and then let’s say year by year you did the same thing, or making the same amount you converted every year.
Speaker 1
So I’m sitting here at retirement at 65, and in this fourth component of this 401K, this fourth compartment, I have a million dollars that’s now worth 2 million, that I’ve contributed a million. It’s now worth 2 million. I’m taking it out. I’m in the highest tax bracket. I now owe $370,000 in taxes. Jameson, year by year, disciplined manner, put the money into after tax, took the extra steps to make the calls, do the paperwork to convert it to Roth. He now has that million that’s grown to 2 million inside of a Roth. All $2 million to him is tax free. So that’s just a simple tax savings of $370,000 if you follow this process year by year. So, Jameson, what happens if you put in the 23,500 and there’s market growth throughout the year?
Speaker 1
So let’s say that 23,500 is now worth $26,000 at the end of the year. And then you go to convert that. What do you have to show in your tax return now?
Speaker 2
What’s the difference there? 2500 of market growth you pay taxes on. So it still all goes into the Roth IRA. But that little bit of growth, so that’s the important thing. Like you said, it won’t meet new clients all the time that are 60 years old and they’ve never done this conversion. They have hundreds of thousands of dollars in this after tax bucket. But yeah, to directly answer your question is just that, what any growth is taxable income is taxable as income. So if you do it each year, and again, some plans allow this twice a year. Some plans do it automatically. As soon as you put it in, it just converts immediately. And then you could never pay taxes on any of that money if it’s done efficiently.
Speaker 1
So, really important. And a lot of times we’ll meet with physicians that have been doing after tax. They don’t even know they’ve been doing after tax. A lot of times, if you have a high salary, you put in a percentage and you max the 402 G limit the money. Just instead of stopping once, you max, they’ll spill it over in this after tax. A lot of times we meet with people at like UPMC, for example, very common one where we’ll meet with a doctor that wants to do retirement plan. They’re 60, and they’ll have a million dollars inside of an after tax account. And half a million of that is basis. Half a million of that is growth.
Speaker 1
Then we have to decide, do we want to rip the cord and do a one time conversion into Barath and pay for most of them, 37% on just that half a million? Or the other option? Maybe we wait till they retire, and then you can take a sniper shot. Like, you can roll the million out and just take the basis to the Roth and take the growth to the traditional IRA. But if you wait like that, hypothetically, the rules could change. Because this is something that has been on the chopping block of the IRS to get rid of the mega backdoor Roth. I mean, it’s going to cost the government, potentially over a million dollars per taxpayer that does this properly.
Speaker 1
So, just to talk about how beneficial this is, we’ve run plans for doctors doing this versus not doing this, saving the same amount of money, just doing the conversions. Doing the conversions. And it’s over a million dollar difference, long term of value that adds in today’s dollars if you’re a young doctor, or even if you’re an old doctor sitting on a large after tax balance. And we get the money into the Roth, where then instead of it sending the after tax, where every dollar of growth becomes subject to taxes, every dollar of growth becomes yours, tax free forever. And also to your kids, tax free as well. Not tax free from inheritance tax if you’re above it, but just tax free from income tax. Okay, so I know we’ve been pretty nerdy so far. James, anything to add before we talk about.
Speaker 1
So let me ask you a couple of questions, just rapid fire common questions we’ve gotten over the last, like, ten years. So, Jameson, I thought I make too much money to do a Roth yeah, you do.
Speaker 2
But there’s loophole. So you can’t directly fund two. Loaded question first. With the Roth IRA, you can’t directly fund a Roth. You do make too much money to put money directly into Roth IRA. You can, however, do what’s called a backdoor Roth IRA. So again, this is two universes IRA. And then assuming you have a four or three B. Four or three B plan is totally separate IRA. Do an after tax IRA contribution, convert it to Roth. Assuming you don’t have any traditional IRA balance, we’re going to assume you don’t. Perfect. You do a backdoor Roth, fix that problem. Let’s say you did have an IRA balance. You can’t do that. You’re over the income limit to do a Roth IRA. So you can’t do a backdoor Roth IRA. Shift to the 403 B plan. The other universe, there’s zero income limit on that.
Speaker 2
So that’s one nice thing about this. If you do have what it’s called aggregation issues or tax law, tax rule, whatever you want to call it, where you can’t do the backdoor Roth because you have a pre tax balance. This is a way that you could get around that and fund money into Roth 401K, Roth 403 B mega backdoor Roth. And that goes out the window. So no income limit at all.
Speaker 1
Okay, awesome. So I could be making as much money as possible and still do this. Mega backdoor Roth.
Speaker 2
Yeah.
Speaker 1
Okay. So my accountant told me that I shouldn’t do a Roth because I’m in a highest tax bracket now and I’ll be in a lower tax bracket later. What’s your short answer for that?
Speaker 2
You. Very well. Maybe I’m just going to assume here that we’re talking to someone that’s high income earner. You’re going to have a couple of million dollars in a pretax IRA, 401K. You’re going to have a large, non qualified account. So you’re going to have at least like 50,000 a year, probably of dividends that gets shown as income, plus Social Security, maybe a pension, maybe part time work, maybe you have private equity or other things that get added on to your tax return, capital gains. And all this stuff that we don’t think about is automatically going to push us up into more a higher tax bracket than we think. And then RMDs are going to kick in. And if you have a few million dollars in a pre tax IRA, that’s going to be pretty significant, even if you don’t need the money.
Speaker 2
So you could be in a lower tax bracket with what we’ve seen, with all those things, you probably won’t be. And then, as well as taxes right now are historically low, if you look back at the previous tax law that we’re in, a low tax environment, we know it’s going up in 2026, probably going to be even higher in the future, is my professional opinion. So let’s take advantage of locking in low tax rates right now.
Speaker 1
Absolutely. Well, I appreciate that. And one thing I’m going to add, not stepping out of the hypothetical conversation here, is that most people that are going to cash flow megabactor off, they’re executives, they’re physicians, they’re people that make, let’s call them, top five percenters, essentially. So probably a household income over 500,000. Right? So with that being said, the people in those kind of careers have a high want for autonomy and control. That’s what made just the psychological profile of someone like that successful, typically values achievement and success and really in return wants autonomy over their life. And so if you look at how your money supports your life, Roth gives you autonomy. Pre tax does not. And this forget tax equations that CPAs can get really caught into.
Speaker 1
I really believe from a tax perspective, you’ll win dramatically with a Roth by having it at least be like a third of what you do throughout your life. You shouldn’t do all Roth. I get it. Like you’re going to have pre tax exposure. You want to navigate the equilibrium of tax brackets and have some that does come out lower rates and some that avoids higher rates. If you have a widow situation, your tax brackets shrink in half. If you have Medicare rates, you’re trying to keep low. But the biggest reason why I think a Roth is important for these kind of clientele is the control. So with a Roth, megabacked or Roth, et cetera, all of that when you retire can be consolidated to a Roth IRA. And with a Roth IRA, there’s no required distributions.
Speaker 1
And if you reference episode two, we go into detail about sequence of return risk. And when the market’s going up and down and you’re retired with a Roth IRA, you have full control. You don’t need the government dictating how much to take out like they would in a pre tax account. The market drops, there’s no loss. You can just let it recover versus a pre tax account every year that you don’t take it out. There’s a steep penalty when you don’t take it out. So the control aspect, I think, is so important, it’s never talked about, though.
Speaker 2
I had to make analysis. I just thought of this, too. I think a lot of not knocking CPAs, there’s a lot of really good CPAs, but a lot of them are very short sighted and they’re very, how do we maximize your tax return this year and make you pay like the least amount of tax as possible? But if you’re really looking at things through the lens of your entire lifetime, and so, same thing. I’d use the analogy of your health. You could do like a fad diet for a month and maybe you see a bunch of health benefits, but if after that month you stop doing the fad diet and you just go back to your old habits, that’s not a sustainable, anything you do with your health, you want to make it.
Speaker 2
At least I do, like long term sustainable for your entire lifetime. And same thing with looking at taxes. We don’t want to just look at the lens of what you’re doing this calendar year. How do we maximize it? It’s like, no, let’s take a long term time horizon and let’s project out what your tax situation is going to be 40 years from now and make sure that this entire lifetime is optimized.
Speaker 1
No question. Completely agree. Okay, well, let’s go through, can you think of any other, so how would one go? Well, first of all, can you think of any other qUestions, common questions we’ve gotten about the mega backdoor Auth. A lot of times the clients will say, my financial advisor said I wasn’t eligible to do that, or it said it doesn’t exist because I work for an employer. I actually just gave a talk for allegated health network and that was like two or three different people walked up to me and they said, my financial advisor said I can’t do this. Well, we do it for like 100 physicians, Ahn, so they can’t do it. We do it every year.
Speaker 1
So I think that’s a common one is sometimes you do have to dig deep because when you call the company, they a lot of times don’t know.
Speaker 2
You can do it.
Speaker 1
Well, they don’t know what a mega backdoor Auth is. I mean, this is kind of hidden in the tax code. Again, 20 14 54. But the mega backdoor Auth is just like a slang term that financial advisors use or made up, really. The code is putting after tax money in and then looking at the summary plan description, which if you’re an employee of anywhere, you can ask for the summary plan description. And sometimes the summary plan description doesn’t even show it then going in the software and seeing, am I eligible to convert after tax to Roth? If you are, great. If not, you call the custodian, give an example. Like Humana, ADP, another example, we call them. They said, no, you can’t do this. Well, we started digging around. You absolutely can do this.
Speaker 1
There is a mega back to Roth at both of those companies. So sometimes it does take a lot of work to get to the bottom of it and know what you’re asking for. But a good financial advisor can get to the bottom of it for you.
Speaker 2
Yeah, I’d say just get the plan description, do some research, and then exactly what you said. A lot of financial advisors don’t understand this, unfortunately, which in return, if you’re not a financial advisor, you’re going to probably not fully understand this unless you do your homework. So consult someone that has a good understanding of this, and you probably just have to do some homework. But let’s dive into specific compAnies.
Okay, perfect. So our favorite one. Well, our favorite two, the two enemies, UPMC and Hn. Let’s talk about this is. And there’s caveats to every one of these. It’s just not simple. Sometimes you can’t reach those limits. So, UPMC is. If you think about UPMC, there’s lots of physicians, but they also have lots of nurses and MAs. And so a 403 B, or four one K has to pass what’s called a discrimination test. There’s three ways to do that. But how UPMC does this is they do allow, they give a nice match. If you put in 6%, they’ll put in 3%. Right off the bat. However, the after tax component, they do cap you at 6%. So let’s just go through some numbers here. I think you gave an example. Okay, so let’s say 22,500 goes in the Roth.
Speaker 1
Let’s just say someone’s making $500,000. So 22,500 goes in the Roth. Now, you would take 5% of your salary to get to that 22,500, and you’d be maxed out probably around November. So then what you do is you’re eligible to another 6% of your salary into after tax. So 6% of 500 would be 30,000. And then you’re going to get a 3% match of the 500. That’s 15. So all in all, we’re above it. So what’s going to happen here is we have to be careful, because also some employers, if you contribute too quickly, then the match will shut off. So if someone’s making $500,000. At UPMC, we would recommend put in the exact amount, or put in, let’s just say, 5% into Roth, 5% into after tax.
So that would mean 22,505% of the 500 be 25,000 after tax, and then the match would be 15. So that’d be 62 five. That would get us pretty close. Ideally here, we need to put in the exact dollar amount for the Roth, and then do 6% in the after tax, and then make sure that we don’t max out too quickly to also get the free money, if that makes sense. And then if you’re making a million dollars a year, hypothetically, you’d want to do about 3% Roth, 3% after tax, or two and three. You always want to do 6% to get the free money. So, hypothetically, there, you do three and spread it out to get the free match, and also get to the full four, one, five C limit.
Speaker 1
But the point is, with UPMC, because of this 6% cap and because of the match, you want to make sure it doesn’t go too quickly so you don’t lose the match. There are literally individual calculations we do for every single client, based upon their income to see, are you eligible now, it’s easier if you’re like, let’s say a $300,000 income, because then the 22,500, hypothetically, we just put an 8% right in the Roth, 22,500. We’d do the 6% max in the after tax, that’d be 18,000. And then we’d get a 3% match. So that’d be 9000. So, all in all, here we’re at 49,500. There’s no possible way. The plan doesn’t allow us to get to the 66,000. So if your income is like, let’s say, 400 or less, it is a pretty obvious calculation.
Speaker 1
It’s the higher incomes that you have to be really careful about not losing the free money, but also maximizing as much as possible to get the mega backdoor Roth implemented correctly. And then sometimes you do have to go back in and recalibrate that on a year to year basis. Again, if you want to solve for getting the most amount of money in and also getting the free money, that UPMC would provide. Anything to add to that?
Speaker 2
No, then you just got to. So once you do that, then the after tax needs converted to Roth UPMC, you’re allowed to do it twice per year.
Speaker 1
So, tell about the systems we have in place to do.
Speaker 2
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Which we’re starting to do. Right now, as we’re approaching quarter four, we have tracked every person, client that has the mega backdoor Roth option. And then at least once a year, we go in and do this conversion between now and December.
Speaker 1
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And the reason at UPMC, we do it twice a year because they allow for it. And so the key for that is we want to convert it before it’s grown, because if you let it ride the whole year, then you do pay taxes. If the market had a good year on the growth. But if we catch it halfway through the year, convert it, and then do the second half, then we’re lowering the tax liability for our client. So we always do the UPMC side twice a year, and then some other plans, for example, or once a year that we do. But the UPMC is pretty simple. It’s an in plan conversion. And then once you reach 59 and a half, you actually are eligible, even if you still work there, to roll your money out to IRAs.
Speaker 1
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The reason that’s so important at the age of 59 and a half is to get money from a 403 B or a 401K into an IRA. Into a Roth IRA. Specifically, you can roll your Roth money into a Roth IRA, you can roll your after tax basis into a Roth IRA and your after tax growth, then into a traditional IRA. The after tax rollover to a Roth has a five year time window on it. If you roll that to a Roth IRA and then use it four years from now, there’s a 10% penalty on the basis. And so if you’re going to retire, your money is so much more valuable in a Roth IRA, that is a Roth 403 B or Roth four hundred and one K. And the reason for that is because there’s no required minimum distributions on the Roth IRA side.
Speaker 1
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If you leave money in a Roth 401K, you’re never going to pay taxes on it when you take it out, but it is subject to required minimum distributions. So if the market’s up, the market’s down. The market’s up, the market’s down. Every year you have to take it out, versus, if we get that to a Roth IRA, you gain full control of that money. So Roth IRA, from a control perspective, is so much more important. So again, if you’re a UPMC, twice a year we’re doing conversions as you’re working. Once you reach 59 and a half, then we’re staying disciplined to roll it out every year to hit that five year clock. So when you do retire, you have as much money as possible in that fully autonomous account where you fully control it. The Roth IRA, not the Roth 401K.
Speaker 1
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So that’s, I think, a very unknown thing is that once you reach 59 and a half, you can still be employed. Roll out the money, keep the plan and keep contributing to the plan, but get all that money vested outside of the plan to start that five year clock. Anything to add to that?
Speaker 2
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No. UPMC has a great one plan that allows if you’re a high income earner, you can get the full four one, five C limit, which is not always the case without a plans are drawn up.
Speaker 1
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Yeah, no question. Okay, so Allegheny Health Network, walk us through this one.
Speaker 2
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Yeah. So similar but different it is in plan conversions, just like UPMC. Any of the after tax you can convert to Roth, you can’t roll it. They used to be able to roll it to an IRA and then when they switched providers. Think last year, you have to do the conversions, has to stay in the 401K plan. But we’ll just go through the example. If you are, let’s say, making. We’ll stick with that 500,000 of income. You’re going to do that 22,500 Roth deferral.
Speaker 1
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And you have to be really careful here, because AHN, unlike UPMC, HN based the contribution limit off of the IRS income. So explain that.
Speaker 2
·
So it’s off of that 330,000 IRS. I don’t know what the actual term.
Speaker 1
·
Compliment.
Speaker 2
·
Yeah, it doesn’t matter. Yeah, it’s based off of that. So after tax contribution, you’re able to do 5%. They cap you at 5% of the.
Speaker 1
·
330, versus UPMC will be 5% of the full 500.
Speaker 2
·
So in that example, you’re getting your 22,500, and then you’re going to get 16,500 into after tax, and then they match 16,500. So what’s the total there? 323-354-5555 thousand, 500, something like that. So you’re under the 66.
Speaker 1
·
You can’t get to the 66 in Alginh Health Network, it’s impossible. But you can get way above. I mean, you can get in the 50s, close to 60 range, and get that extra 16,500 a year in the mega back to Roth component of that fourth component, because basically you’re able to do the 22,500 deferral into the Roth, get the 4% match, plus they contribute 1%. So they put in a total of 5% of your first 330. That’s 16, five that will go into that pre tax bucket, all funded by Allegiance Health Network. And then the 16,500, in addition to that which is a 5% after tax, then on a year by year basis, can be converted to the Roth. I mean, that’s huge.
Speaker 2
·
Yeah. And this just changed, too. Like I said, they switched providers, I think it was last year, and used to only be able to do 3%, and now they gave you that extra. It used to be 2%, now it’s five. So if you are an AHN physician, if you don’t work with us and you haven’t maximized this, then you have.
Speaker 1
·
An opportunity to increase to 5%, no question. So, basically, if you’re under 50 at Allian Health Network, you can get a total of 55,500 in. And if you’re over 50, you can get a total of 63,000 in.
Speaker 2
·
My math is spot on.
Speaker 1
·
I just did the mental math while you were doing it. Is that what you said?
Speaker 2
·
Yeah.
Speaker 1
·
Okay, perfect.
Speaker 2
·
And then let’s talk about anything else in HN.
Speaker 1
·
No, this is the one. I think UPMC, the words kind of get buzed around where it’s available. And IHn, I feel like it’s still a secret. Like, people don’t know because it just changed. Provider. It changed so many times. It changed from fidelity to fidelity, then fidelity to somebody else, then to Transamerica, then a light.
Speaker 2
·
Yeah, and I think, too, because it used to be 2%, it was only, like, $5,000 a year. So people didn’t care as much.
Speaker 1
·
That’s a lot of changes over the last ten years. I’ve been doing talks at HN for 13 years now. And having a provider change, like, four times, let alone one time. I mean, most people, they’re training medicine, not finances. That’s a lot to keep up with.
Speaker 2
·
Yeah. I say, let’s go on. I don’t know why, but I’ve seen a lot of tech companies allow this. Like, pretty much every tech company.
Speaker 1
·
Yeah, tech companies. They’re in front of the computers. They do lots of research.
Speaker 2
·
Smart people, I guess.
Speaker 1
·
Usually we see tech people are a little bit more like, do it themselves in finances than doctors are.
Speaker 2
·
I wonder. This is interesting. I just noticed, probably because they have complicated equity compensation with stock options, RSUs, and again, unfortunately, a lot of financial advisors can’t give great advice on that. Some are very good and some are not. And so it’s probably their default to do their own homework and research all that stuff. So, yeah, they’re usually more in touch with it, and I think a lot of tech companies. So you have this list we’ll go through in a second. But Google, for example, they’re allowed to get to the full 66,000 and then theirs converts automatically. So you don’t even have to go in and do it. It’s just when you make that after tax contribution converts, and I’ve seen a lot of, for whatever reason, a lot of tech companies, it’s the same, exact same setup for sure. Run through the list.
Speaker 1
·
Yeah. So some of the ones we’re very familiar with. ADP is a really good company here. A lot of big exposure in Pittsburgh, obviously. And they allow it. We had to really dig that up. I would say probably less than 1% of ADP workforce knows that they are allowed to make it back to Roth because we called, oh, geez, three or four times and they said no. And then we finally got to the bottom of where you can’t do it. But it does require a lot of work. So ADP, all the big, what do they call the thing? Yeah, Facebook, Apple, Netflix, Google, Amazon, obviously those allow it. Microsoft does. Uber, Oracle, MasterCard, Snapchat. I’d have a whole list of 50 companies here. The point is, if you work at a big company, most likely the mega backdoor Roth is available.
Speaker 1
·
And the advice is if you call HR and they say no, if you call your 401K provider and they say no, over half the time where we hear that no, we still are able to find that it’s a yes. They don’t know what a mega backdoor Roth is and they don’t know the steps actually do exist to be able to do it. Inside of the 401K plan.
Speaker 2
·
I’d say read the summary plan description. And another failsafe or something you could look at is if you go on your contribution website. So fidelity, for example, and you go edit your contributions, there’s going to be an option to do after tax. And if there is an option that’s an indicator, if there is any option to make an after tax contribution, then this probably exists. So that can give you be the.
Speaker 1
·
Catalyst to do some homework, no question. Well, welcome any questions you have on the Megabactor Roth. And we’re here, obviously, to help you implement the megabactor Roth. We do this for all of our existing clients, have it available. We’re also happy to do a free consultation for you. If you’re not sure if working with a financial advisor is a good fit for you. We want to make sure it’s mutually a good fit for us and for you, and make sure it’s a long term relationship, obviously with no contract. Also, please, if you haven’t already. Feel free to share these episodes with friends, family, anyone that you think would find beneficial. And please also rate and review the podcast if you haven’t already. Thank you very much. Thanks for tuning in to our podcast. Hopefully you found this helpful.
Speaker 1
·
Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.
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