By Scott Bishop and Tom Mountain
Boeing offers excellent retirement packages, and the 401(k) supports a “mega backdoor” Roth strategy. For employees earning higher incomes, sometimes there is a benefit to making greater retirement contributions than what is allowed through standard pre-tax withholdings. This approach also offers an opportunity for high-income earners who exceed the annual thresholds for standard Roth IRA contributions. In 2021, you cannot contribute to a Roth IRA if you earn more than $208,000 (married filing jointly) or $140,000 (single). (1)
The Backdoor Roth
To understand how a mega backdoor Roth contribution works, it helps to first understand the more basic concept of the backdoor Roth. A backdoor Roth allows a plan participant to circumvent the $6,000 annual contribution for Roth IRAs ($7,000 for employees over 50 years of age). To utilize a simple backdoor Roth strategy, you would contribute funds to a traditional IRA, then convert those same funds to a Roth IRA.
Using a backdoor Roth, if you fund the traditional IRA with 100% pre-tax dollars, the tax will become immediately due on your contributions as well as any earnings the plan has accrued. If your traditional IRA contains any after-tax or Roth contributions, you should be aware that the IRS’s pro rata rule requires you to roll the money proportionately according to the makeup of your fund. For instance, if you have a traditional IRA containing $95,000 in pre-tax contributions and $5,000 in post-tax contributions, and you convert $10,000 of the money into a Roth IRA, you will need to convert $9,500 in pre-tax dollars and $500 in post-tax dollars, so the taxes will be immediately due on the $9,500. (2) In other words, you can’t just move your after-tax dollars first to avoid the tax bill.
The Mega Backdoor Roth
A mega backdoor Roth strategy utilizes the same basic principle of funding a Roth account indirectly by way of your 401(k), allowing you to contribute additional funds to a Roth IRA, limited only by the annual combined maximum contribution limit for your 401(k). In 2021, your total contributions to your 401(k), including pre-tax, after-tax, and employer matching, is $58,000 (or $64,500 for employees over 50). (3) Let’s say you are under 50 and your salary is $100,000 and you max out your 401(k) and contribute $19,500. Boeing matches 75% of the first 8%, or $6,000. That leaves an additional $32,500 of “mega backdoor” contributions you can make. In order for the strategy to work, you need to be able to make both after-tax contributions to and in-service distributions from your 401(k), both of which Boeing allows for most plans.
Making Contributions
After you max out your pre-tax 401(k) contributions, you will need to make after-tax contributions to your 401(k) up to the annual limit. Then you will transfer the amount of your after-tax contributions to the Roth IRA. You will have a smaller tax payment due at the time of transfer using this approach as opposed to a standard backdoor Roth, because you will have already paid taxes on the amounts you contribute. If your account accrues earnings between the time of your contribution and the transfer, you will need to pay tax on those earnings at the time of transfer.
The mega backdoor Roth strategy only makes sense for employees who have additional earnings to contribute to their retirement above the contribution limits. Keep in mind that Roth accounts must be established for at least 5 years and you must not make withdrawals prior to age 59½ in order for the funds to grow tax-free, (4) so the strategies outlined here may not always make sense for those close to retirement.
We’re Here To Help
We enjoy working with Boeing employees. If you would like to take a look at your retirement and see if you are utilizing the best possible options, we’d love to meet with you and learn more about your goals to see if there’s a good fit for us to work together. Reach out to us at 562-432-3783 or [email protected] to schedule a free introductory meeting.
About Us
Mountain-Bishop Private Wealth Management is a full-service independent financial services and investment services firm that has been providing retirement and investment guidance to high-net-worth individuals, business owners, and Boeing employees for more than 25 years. Through our long-term guidance, we strive to help our clients build, protect, distribute, and transfer their wealth, tailoring our services and strategies to address each client’s unique needs so they can bridge the gap between their current financial situation and their long-term goals.
Scott and Tom built their practice on trust and excellence. They focus individually on each client, delivering the personalized touch that is missing with many other firms.
The Financial Consultants of Mountain-Bishop Private Wealth Management are registered representatives with, and securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: (AK, AZ, CA, CO, FL, GA, ID, IL, MI, MO, NC, NJ, NM, NV, OR, PA, SC, UT, VA, WA) SCOTT E. BISHOP CA LICENSE OB55872 THOMAS P. MOUNTAIN CA LICENSE OB55827
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(1) https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021
(2) https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans
(4) https://www.irs.gov/retirement-plans/roth-acct-in-your-retirement-plan