UPMC Mega Backdoor Roth 2024 Updates

In this video, Matt delves into the Mega Backdoor Roth at UPMC, particularly for physicians. He explains the IRS limits, such as the 402 G limit, and compares Roth and pretax contributions. Matt illustrates the 415 C limit for 403 B and provides an example for maximizing the Mega Backdoor Roth for a physician earning $500,000. He covers elective deferrals, matching contributions, profit sharing, and after-tax contributions, emphasizing the tax implications at retirement. The video concludes with insights into the Roth IRA and the five-year rule, offering a comprehensive guide to navigating the Mega Backdoor Roth strategy at UPMC.

Video Transcript

Today’s video, we’re going to be talking through mega backdoor Roth at UPMC specifically, we’re going to use examples for physicians. So starting out, this is a very unique opportunity. In 2014, there was a tax code passed called 220 1454. You can look this up, that allow house for what I’m going to explain in this video. But first, I want to provide a couple of IRS limits. So a lot of you will be familiar with what’s called a 402 G limit. A 402 G limit is simply what you can put into an elective deferral or Roth or pretax. So when you go in, the first thing you select is how much you want to put in, and you want that to go roth or pretax.

 

If you’re under 50, and this is for 2024 calendar year, specifically as IRS adjusts these amounts for inflation, not every year, but typically every year. So they got adjusted a little bit from 2023 to 2024. So now if you’re under 50, you can put into $23,000 per year and put that into a Roth or pretax. And if you’re over 50, there’s a catch up of 7500. So you can put in the 23,000 plus an additional 7500 for a total amount of 30,500. So the big question then is, where do I put this money? Do I put it into a Roth? Where a roth, you pay the taxes on the way in, so your paychecks will be a little bit more as the money is going in after tax, but then it grows tax free.

 

And then when you take it out, assuming that you’re 59 and a half, then it’s all tax free, and it doesn’t hit what’s called your modified adjusted gross income. So a couple problems we see with pretax. Now, let’s talk about pretax for a second. The money goes in with no taxes early on. So the nice thing is, if you put in, let’s say, hypothetically, you’re making 30,000, or, I’m sorry, you put in 30,000 pretax and you’re in a 35% tax bracket that year alone, you’re going to save 10,500 that year in taxes, assuming you’re in a 35% federal tax bracket. But to get that benefit up front, you also get the benefit of no taxes as it grows.

 

But when you take it out, assuming you’re 59 and a half and you don’t have a 10% penalty, you take it out, it all gets taxed at whatever rate you’re in the future. And so one argument to do pretax over Roth now is very simply, am I going to be in a lower tax bracket when I retire than I am today? Can I get it in at 35% savings today and then take it out at 22% later? And so, a couple of other things I’m going to say. It’s not just a tax calculation, but usually our high net worth clients.

 

So those making, let’s say, 500,000 plus of income per year, what we find is they accumulate enough assets that when they retire, even though their kids, their house, their kids are out of the house is paid off, maybe their school loans are paid down. What we find is that their tax bracket is similar to what it was when they were working, when factoring in these pretax distributions, because at 73 required distributions start out of this thing. And when you add up Social Security and dividends and interest from your non qualified account, typically you’re going to be right back in that tax bracket.

 

So the reason we really do like Roth being at least a third of your portfolio when you retire is not only do we get tax free, if you roll the Roth to a Roth IRA, then you have no required distributions. This avoids Medicare surcharges or doesn’t get calculated in. If one spouse passes, the tax brackets get cut in half. So you’re able to, as a widow, manage taxes and then really, sequence of return risk is huge here. And we have videos and resources that we’ll reference just specifically on those. But just a quick breakdown between the difference between Roth and pretax. The next up for the UPMC is what’s called a four one five C limit. A four one five c limit is the total amount that’s able to go into your 403 B in 2024, same thing as a 401k.

 

Under 50, the total is 69,000. Over 50, the total is 76,500. And so now the question is, well, how do we get that money in? Well, real quick, when we talk about a match, I do want to point out that the maximum compensation for 2024, the IRS allows on a match is $345,000. So now let’s use an example of a physician that’s under the age of 50 that’s making $500,000. So how would we maximize this megabactor Roth? And what are the mechanics? So, first of all, we’d recommend, let’s select the elective deferral. Let’s do a $23,000 contribution there and set that up. To achieve that, through every paycheck throughout the year. So usually we’ll specify a dollar amount and then the match of 3%, you need to put in 6%. So we’ll show you why.

 

We’re going to make sure you put in 6% in a second. But to get the free money, it’s a 50% match up to 6%. So if you’re making half a million dollars, 3% of half a million is 15,000. Will you get that? The answer is no. They’ll only match you 3% of 345,000, which is the max. The IRS allows them to match you. So the match actually ends up being 10,350. Well, $23,000 plus 10,350, that’s not the max of 69,000. So where else do we go? Well, there’s two other options. To get the total of the 69,000 in there’s a profit sharing. Now, that would be up to UPMC. They do not do that currently. And then the fourth thing would be an after tax contribution, which is capped at 6%.

 

So if you’re making half a million dollars, 6% of half a million is 30,000. So now the total that we’re putting in is 23,000 into the Roth, 10,350 into is the match, the free money, and then 30,000 is the after tax. So the total is 63,350. So we’re not quite up to the $69,000, but this is the most in this example we could do. To get the full 69,000 in, we would need to make a little bit more money. So, hypothetically, if you were making 600,000, then 6% of the after tax 600,000 will be 36 and you could reach the full 69,000. So if this is your 403 B, basically what you’ve done is it’s one account, but the IRS and UPMC will track this separately. So the first. Imagine you have three compartments in your 403 B bucket.

 

The first compartment is the Roth that gets tracked separately. And when you retire, you can roll this to a Roth IRA. The second compartment is the match. Now, this is going to come out with taxes when you retire, because UPMC funded it all in with. They took the tax deduction on that. And then the third compartment is an after tax bucket. So the after tax bucket, if we leave that alone, what happens is, let’s say you put in 30,000 for ten years, and so you put in a total of 300,000. But then there’s also that 300,000 grew to 600,000. So in that example, you have an after tax bucket. We’re just looking at the after tax. You put in 300,000, it grew to 600,000. You go now, retire. The $300,000 comes out with zero taxes.

 

That’s just your basis being returned to you that you’ve already paid taxes on. But the 300,000 would still get taxed. And if you’re at that 35% tax bracket, you’re now paying $105,000 in federal taxes. That kind of hurts because this also has required minimum distributions attached to it at 73. However, this is where the mega backdoor Roth comes into play. So on a year to year basis, we can take that after tax. So, just to draw this out again, so we have the Roth, we have the match, and then we have the after tax compartment. And so, assuming that 30,000 per year is flowing in here, well, twice per year, you can convert that after tax component over to the Roth. And so now, assuming in this example, let’s say that you put in $30,000 and every year it grew to $31,000.

 

When we do that conversion, you’re going to get $30,000 over tax free. The $1,000 of growth would get taxed that year at that tax bracket. So it cost you $350. And every year times ten years, so that would cost us $3,500. But in the result, in that same example, if that $300,000 was converted inside every year to the Roth, along the way, we would have paid $3,500 in federal taxes a little bit each year. But then the same growth, we can invest in the same funds of 600,000. When you go to retire, since it’s already in the Roth, there’s absolutely zero taxes when you take it out. So now we’ve saved 105,000 in exchange for 3500. And also we have no required minimum distributions, assuming that you roll to a Roth IRA.

 

Now, one thing we have to look out for when we roll to a Roth IRA is there is a five year roll. If you pull it out after five years, before five years has elapsed from the conversion, there’s a 10% penalty. So we really want to be disciplined and roll this right to a Roth IRA after 59 and a half, if you’re still working, UPMC allows you to do that, or you can do that when you retire. And we just have to wait five years, which typically, Roth is a compartment that we want touch later in retirement after we’ve exhausted some other resources, because that tax free growth and that tax free distribution for your spouse, also goes to your kids. Tax free estate taxes will be a completely separate issue, but there’s lots of benefits to the Roth.

 

So that’s in general, how to complete the megabackdoor Roth, and a detailed overview of why it exists, how to do it, et cetera. Welcome. Any questions? If you want to reach out and show you how to do this inside of the elite portal, which, again, you can do twice per year, you have to be careful when you do, because when you go to convert, you have to select the right amount, or else if you’re converting pre tax money, you have a huge tax bill that we want to avoid. You can go in there and basically just select just the after tax that you’re converting to the Roth on a year to year basis. Look forward to answering any questions, and thanks for joining.

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