The UPMC Mega Backdoor Roth

This video discusses how to maximize the UPMC Savings Plan for tax-efficient retirement. Key points:

  1. Contribute $19,500 (or $26,000 if over 50) to the plan, preferably as Roth contributions for long-term tax benefits.
  2. UPMC offers a 50% match on the first 6% of your salary, up to $8,550.
  3. Beyond the match, you can contribute more (up to $57,000) in an after-tax account, which can later be converted to Roth within the plan.
  4. This “mega backdoor Roth” strategy minimizes taxes and provides tax-free growth and distributions in retirement, making it a valuable option for high-income earners.

Video Transcript

Today we are talking about how to maximize the UPMC Savings Plan and to go above and beyond the normal contributions that you’re used to making and to maximize how much is going into a Roth and what’s referred to as a mega backdoor Roth, which will set your retirement up for optimal tax efficiency.

Excited to share advanced planning opportunity inside the UPMC Retirement Plan as you know, there are several parts of your plan. There’s the cash balance plan that UPMC funds three, four, or 5% of your salary into that is for free, and nothing you have to do to receive that.

So today we’re talking specifically around the UPMC savings plan. There are two nerdy terms that we need to be aware of. The first term is what’s called a 402 G limit. The second term is what’s called a four one five C limit.

The 402 G limit simply means if you’re under age 50, the maximum you can put into the 402 G is 19,500. If you’re over age 50, that’s 26,000. You can decide whether to put that into a Roth account or a Pretax account.

Often debated. Should we do Roth or pretax? And we could debate this all day. Pretax, you get a nice tax deduction right now, most likely, if you’re watching this video, you are in a high income tax bracket.

When you retire, you’ll be in a lower income tax bracket because your kids are out of the house and your house is paid off. Unfortunately, the government has mandated after the age of 72, if you have pretax money, there’s required minimum distributions that have to come out, and when those come out, those are fully taxable.

So the couple problems that we foresee is one, like it or not, you will be in a higher tax bracket depending on your other financial assets. And secondly, after the age of 72, with these required minimum distributions, you are forced to take out, and you have no choice whether the stock market’s up or down.

And you may have to be forced to take out at a loss. It, especially if your spending patterns depend on you using that money. With that being said, we really, regardless of tax rates in the future, we love the Roth option.

The reason we love the Roth option is you prepay the taxes today, the growth is tax free and then the distribution is tax free as well. This also, when you retire, can be rolled to what’s called a Roth IRA.

And the reason we would recommend that later is there’s no required minimum distribution. So not only should money provide support of your life by design, it should also provide peace of mind and autonomy.

And a Roth IRA allows you to never worry about tax rates and to not worry about the market either. Because without the need of taking required minimum distribution you can pull from it if the market’s up and you cannot pull from it if the market’s down.

So ultimately gives you control of when, how much and if you take the money. This also passes your kids tax free or the Pretax account would be taxed for your kids and they now have to take it out within a ten year window which would make their tax bracket potentially skyrocket.

The other term that we have to be aware of is what’s called a four one five C limit. And this is a maximum of 57,000 under age 50 and then 63,000 over age 50. So looking at the UPMC plan specifically and we’re going to use an example of someone under the age of 50 making $500,000.

So the first decision you have to make is what do you put in the 402 G limit? Do you go pretax or Roth? So we would recommend the 19,500 go to Roth. Regardless of you’re making 200K or a million, we would still recommend her off with today’s low tax bracket environment.

And if you see on this slide, the blue is the lowest tax brackets and the yellow is the highest tax brackets. In 1920s to the 1970, highest tax bracket averaged around 70%. The last 20 years, tax brackets have only averaged.

The highest tax bracket has averaged around 35%. We don’t know where this is going in the future, but with COVID the stimulus money that was just printed by the government, and the debt that we’re already in as the US.

Country, the government typically gets that money back through tax revenue. So we would rather take the risk off the table now, prepay the taxes. You don’t have to worry about the government’s decisions in the future dollars.

With that being said, the second option or the second automated part of the UPMC savings plan is they’re going to match you 50% of 6%. Now, this gets capped only on the first $285,000 that you make. So it’s 3% of 285, which is 85 50.

Now, most people we see stop right there, they max out the Roth, they get the 3% match and they think that’s all they can do. Well, you can actually continue to go. And there’s another close to $29,000 that can be put in.

And that’s what we refer to as an after tax account. So the after tax account, if you’re a highly compensated employee making over the 285 limit, they’re going to cap you to only 6%. But 6% of the 500K in this example will be 30,000.

We can’t quite get in 30,000. We can only put in 28,950 because, again, we need this, this and this. All three of those make up the four one five C limit, which is, as we described earlier, is only $57,000.

That’s still a tremendous opportunity to put money into this plan. We would recommend, if the cash flow allows, to fully maximize it, because any money growing in this plan inside the state of Pennsylvania is fully asset protected and creditors cannot get in this if you’re in a lawsuit.

So the other reason and why this is referred to as a mega backdoor Roth is this after tax account. The 28,950 can be converted to a Roth inside the plan. And let’s say that 28,950 grows to 30,000. You’re only going to pay taxes on the growth when you contribute to the Roth.

That means you get a $28,950 credit when it’s converted to Roth. And if you do this diligently year by year, there’s going to be minimal tax consequences. And then once the money is in a Roth, you’re in the forever tax free zone.

There’s no tax on the growth and there’s no taxes on the distribution, assuming you reach a five year rule, and then also after the age of 59 and a half. Very excited to share this structure with you.

How you set up the plan is key, especially if you’re duly contracted through up and up. There’s some other things that we have to look at. Um, if you have any questions on structuring this plan, if you already have after tax money and want to convert that and want to know what the tax consequences are, we welcome your questions and we look forward to helping you implement this in your plan moving forward.

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