In this video, we discuss tax-efficient retirement planning for Allegheny Health Network physicians. There are three key components to consider: the 402G limit allows for contributions of $19,500 (or $26,000 if you’re over 50), with the choice of Roth or pre-tax options. Due to potential future tax increases, Roth is recommended.
The 415C limit sets a total cap of $57,000 (or $63,000 for those over 50) for your 401k contributions, considering both your and your employer’s contributions. To maximize this, you can use the 402G limit, receive employer matches, and participate in an after-tax election, potentially reaching $39,450.
The after-tax contributions can be rolled into a Roth IRA, offering tax-free growth and withdrawals in retirement, which can save you a significant amount in taxes. It’s essential to make the most of all three components to secure a tax-efficient and protected retirement plan.
Today we are talking about Allegheny Health Network physicians and the option to put extra in for maximum tax efficiency and to secure your retirement plan inside of a tax -free environment. Excited to share an advanced technique for Allegheny Health Network doctors.
As you know, your new plan is with TransAmerica. There are a couple of components that we are going to explain today. To get very nerdy with you, there are two limits that we have to keep track of. The first limit in a 401k plan is what is called a 402G limit.
That simply means you can put in $19 ,500. If you are over 50, you can put in $26 ,000. You have two elections here, either a Roth or a pre -tax election. This is a widely debated structure. Do you do Roth and pay the taxes now and then never pay taxes again?
Or do you do pre -tax, get the tax benefit today, but then have the responsibility to pay the taxes later? Most people we see default into a pre -tax election because they are in a high income earning bracket right now. They figure by the time they get to retirement, their house was paid off and their kids are gone so their expenses will be less.
Due to the Secure Act, which was passed in 2019, the government mandates that requirement of distribution start at age 72. Regardless of whatever your lifestyle requires, when you are retired, you will be forced to use this money, which could drive your tax bracket back up.
We are big proponents of using the Roth mechanism, regardless of what tax bracket you are in right now. One, because we like the peace of mind knowing that you don’t have to worry about tax law changes in the future. Two, because there’s no required minimum distributions if you roll your Roth to what’s referred to as a Roth IRA.
Assuming that the money is in a Roth IRA when you retire, after the age of 59 and a half, everything comes out tax -free. You have full control of when you take the money. There’s no required minimum distributions and your kids will receive the money tax -free when you pass it to them.
If we look at historical tax rates, the blue is the lowest tax bracket and the yellow is the highest tax bracket. From 1920s to 1980s, the average highest tax bracket average about 70%. If we look at the last 20 years, it’s average about 35%. We can’t predict what taxes are going to be in the future, but due to COVID and the stimulus that the government just printed plus the money that the US is already in debt, the way the US retrieves this money is through tax revenue.
Thereby, we do believe that taxes have the potential of being much higher in the future and would recommend regardless of your tax bracket today, being that we’re in a low tax bracket environment, utilize a Roth, pay the taxes now, get the peace of mind, have the autonomy and control of when you use your money, stock markets up or down, knowing when and how much you can use as key to a retirement plan.
With that being said, there is also what’s referred to as a 415C limit. This is the total bucket of your 401K. It includes what you can put in, it includes what your employer can put in. It just states that between the two, you cannot put over $57 ,000.
If you’re over age 50, that’s $63 ,000. I’m just going to use the example of someone making under the age of 50 and someone making half a million dollars. The reason I chose a high income limit is you have to be careful if you’re in a high income limit because they only match up the first 285 and you have to structure your contributions off only the first 285 that you make.
If you’re under 285, then you can just use normal percentages. 402G limit is the first way to put money in. The second way is to receive the free match and then the third way is to participate in what’s called an after tax election. So three components, we can try to get to that total of $57 ,000.
Not every plan allows you to get to the full $57 ,000, but the goal is to get as much as possible into this plan because it’s tax -efficient money and it’s also asset -protected in the state of Pennsylvania if you’re in a lawsuit. Creditors cannot touch anything that’s in this bucket.
So inside this bucket, there’s three components we’re about to talk about. Once it’s in, regardless of which component, that money is completely yours, completely protected. All right, so we’ve talked about the reason to do the 402G limit into a Roth.
That’s 19 ,500. But you wanna be careful because your percentage only works off of 285. It doesn’t work off of 500 ,000. So you only get a match if you do the percentage right and it goes through the whole year.
So at 285, you wanna put in approximately 7%. As long as you put in 5%, HN is gonna give you a match three on three. They’re gonna do a match half of the next two and they’re also gonna give you 1% for free. All you need to know is that their match is 5%.
If you put in five, they’re also gonna put in five. And that 5% only works off the 285, the first 285 that you make, or below 285, they would match that in full. So that works out to be 14 ,250. And then the secret, and some of you are already doing this, is to also participate in an after -tax election.
So an after -tax election, because the plan is top heavy, meaning there’s many high -income earners like yourself as a physician that are participating in the plan, and not enough of the lower income earners are participating in the plan.
So they limit your after -tax at 2%. That could go higher in the future if the plan is restructured. But that 2% works off the 285 and it works out to be $5 ,700. So between all three of these, it’s a total of $39 ,450.
The secret sauce here, though, is that this after -tax can be rolled out to your Roth IRA. And this is not well -known, it’s not advertised. In fact, Trans -American doesn’t want you to do it because it means they lose the management and control the money.
However, if you leave the money in the after -tax account, let’s just say, by retirement, you put in $100 ,000 and it’s grown to $300 ,000. That after -tax account, you are required to take minimum distributions out after 72. You’ll get the $100 ,000 out tax -free, but the $200 ,000 of growth gets fully taxed at your income rates, highest rate right now being 37%.
Highest rate in the future is unknown. 200 ,000 times 37%. That’s a big number. That’s $74 ,000 of taxes. If you spend the time every year, and this is where our team at EWA can help, to roll the money out of the after -tax to the Roth IRA, say an example, 100 ,000 is contribution.
The account has grown to 300 ,000. That money is all yours completely tax -free. So the example I just used, you would avoid $74 ,000 of taxation. Highly recommend that you fully participate in all three components of the bucket.
And if you need any help structuring, we are happy to help and we look forward to answering any questions that you might have.