Updates to AHN Mega Backdoor Roth 401k

In this video, Matt Blocki addresses Allegheny Health Network physicians and recent improvements made to their 401K plan by their new provider, Alight. They focus on the concept of the “mega backdoor Roth” and its benefits. The mega backdoor Roth allows individuals to maximize their 401K contributions, potentially reaching the four one five C limit set by the government. The video explains the three ways to reach this limit: through elective contributions (Roth or pre-tax), after-tax contributions, and employer matches. The discussion emphasizes the advantages of tax efficiency and asset protection in a 401K, especially for high-income individuals. The video also delves into the mechanics of the mega backdoor Roth strategy, which involves converting after-tax contributions to a Roth IRA to enjoy tax-free withdrawals during retirement. It concludes by highlighting the importance of annual planning and seeking assistance from experts to navigate this complex financial strategy.

Video Transcript

Hello. Allegheny Health Network physicians excited to announce that Alight, your new 401K provider, has improved the plan and the ability to do what’s called a mega backdoor. Roth so this video, we’re going to break it down in detail, and we welcome any questions.

Happy to help. We’ve helped hundreds of physicians at Ah then complete the megabactor. Roth there. So there are three ways that you can reach what’s called a four one five C limit. A four one five C limit is how much the government allows you to put in the 401K plan.

If you’re under the age of 50, that total is $66,000 a year. If you’re over the age 50 or above, then it’s 73,500 per year that you can get in the 401K. Why should you care about this? Really simple.

In Pennsylvania and actually, in most states, if you get sued, money inside of a 401K is off the table. It’s totally asset protected. And another reason why this is important is for tax efficiency. As a physician typically in a high tide tax bracket.

And not only is the money protected from lawsuits or medical malpractice claims, the money is protected or it’s extremely tax efficient, especially what we’re going to be talking about today in the mega backdoor.

Roth so how do we get to those totals, which is obviously a large amount? The first way is through what’s called a 402 G limit. So this is your election of what you decide to put in either roth or Pretax.

If you’re under the age of 50, 22,500 per year. If you’re over the age 50, add another 7500. So if you’re over 50, you can put in 30,000 per year in this category. Roth you put the money after tax. Now it grows tax free.

When you take it out, it’s tax free. Both what you put in, plus all the growth we’re a big believer in. Roth even most physicians think, okay, my student loans, my house, my kids, all that’s out of the picture.

It’s paid for. However, if you do a good job of saving. Whether your lifestyle requires the same income that you’re earning. Most likely dividends interest, require distributions that need to happen out of a 401K.

Plus Social Security, it’s going to throw you right back in the highest tax bracket. We also have historical data showing that over 1920 to 1970, tax rates average a lot higher than what they currently are.

So we’d rather take the tax situation out of the picture and make sure you prepay the taxes now so you never have to worry about taxes again when you retire. So roth or pretax? That’s obviously your decision.

And then secondly is after tax. I’m going to come back to that in a second. The third is the match. Now, HN will match up the 4% up to 330 of your income. So if you’re making half a million dollars in 2023, they’re only going to put 4%, not of half a million, which would be 20,000 a year, only 4% of 330.

Plus they give you an extra 1% on an annual basis. So they’ll put up to 5% of that 330 on your behalf. And from there it’s just a reverse calculation because you can put in an extra 5% to after tax, not to exceed this $66,000.

So we’re going to go through two examples of two positions, both the age of 41 making 301, making 800, with a goal to maximize this mega backdoor. Roth so the one making 300 could do 22,500. Roth 5% of 300.

And after tax, which would be 15,000. And then 5% of a match will be 15,000. So the total that would go in is 52,500, not quite up to the maximum they could put in, but because of income, that’s the most you could put in with the elections and the categories of which you can get to that level.

The $800,000 income earner could also do the 22,500. Now also would get 5% not of 800, but 5% of the first 330 they make, which would be 16,500. And. And then it’s just a reverse calculation. So that’s 39 -66 so that’s 27,000.

So the after tax will be 27,000. I would advise this person if you put in 3%, it would be only 24. So I’d recommend put in 4% of 800, which would be 32. They’ll cut you off when you reach 27. And then the total there is the 66,000 for the four one five C limit.

So some calculation have to be put into play here to make sure that you are maximizing the four one five C limit and also the mega backdoor Roth. Now, let’s specifically address what exactly is the mega backdoor Roth.

So the mega backdoor Roth is specifically looking at this after tax amount. This after tax amount, hypothetically, if over time, you put in half a million dollars and that account grew to a million dollars let me just draw that up here.

If it’s left in the after tax account, when you retire, 500,000 comes out tax free, but the other 500,000 has required minimum distributions to it and it’s fully taxed. However, on a year to year basis, you can roll this after tax money to a Roth IRA.

And let’s say that you put in 25,000 a year over 25 years. And so now we have the same million dollars in a Roth IRA. When you go to take it out, all million dollars is no taxes and no requirement of distribution.

So if you’re in a hypothetically a 40% tax rate and you’ve done nothing, that’s $200,000 of taxes and no control of your money. After you’re 73, you’ve got to take RMDs out every year. If you have done a planning on a year by year basis, you’re saving $200,000 at the end.

Plus you have full control of the money. You don’t take it unless you want it. Doesn’t matter if the market’s up or down. No required minimum distribution on the Roth IRA. Huge advantage in your financial plan.

Um. The only thing to realize in the after tax, if you put in 25,000 on a year, it’s growing to 26,000. If we roll that over to the Roth IRA 25,000 has already been paid tax. After tax money goes into the Roth tax free.

The 1000 needs to be converted into the Roth and will be treated as income that year. So if you’re at a 35% tax bracket, that would cost you $350. So $350 times 20 years, that’s obviously something we can deal with.

$7,000 in taxes to save $200,000 in taxes in this example, is a no brainer to do the planning on a year by year basis. Now, to get the money in the Roth IRA it’s got to be a call on a year by year basis to a light.

That’s something EWA we can help you with and show you how to set this up depending on your income level, how to maximize it and then how to track on a year to year basis. Because obviously, as a physician we know the one nonrenewable resource that you don’t have enough of is your time.

And that’s where we are here to help.

Show Full Transcript

Recommended Videos

EWA's Time Management Philosophies
5 Tips for Retirees- Tip 4- Exercises to Prepare for Retirement
Financial Planning for Executives
10 Mistakes That Retirees Make and How to Avoid Them: Tip 7- Annuities
Long Term Care Planning
5 Tips to Remove Stress From Your Finances - Tip 3- Establish Your Top 5 Values for Decision Making