What is New for the Amazon Mega Backdoor Roth in 2022?

Amazon employees have access to an amazing tool that can help them save more towards retirement – the Amazon Mega Backdoor Roth Conversion. It is also known as the after-tax contribution to your 401(k) plan.

An exciting update to the Amazon 401(k) provision now allows employees to save ~$37,000 into the Mega Backdoor Roth portion of their 401(k). Prior to the announcement, Amazonians were limited to contributing only 10% of their base salary, above and beyond their standard 401(k) contribution. Now Amazon employees will be able to contribute up to the Federal 401(k) limit towards the after-tax portion of their 401(k), which can then immediately be converted to Roth.

 

This 2022 Update is a Really Big Deal!

You used to be able to only save $16,000 into the after-tax bucket and now you can save up to an additional $21,300. For most people, this means the ability to save over $37,000 into a Roth within your 401(k).

Let’s Walk Through an Amazon Mega Backdoor Roth Conversion Example

You probably know that within your Amazon 401(k) you can contribute up to $20,500 per year if you’re under 50, and $27,000 per year if you’re 50 or older.

For our example, we will use an Amazon employee who is under 50 years old, making the max salary of $160,000 and contributing $20,500 to their 401(k). This employee also receives the Amazon 401(k) match of which is 50% on the first 4% contributed, which means Amazon will contribute 2% of the employee’s base salary.

For someone making the max Amazon base salary ($160,000), contributing $20,500 into their 401(k), Amazon will contribute $3,200 as a match (2% of the base salary).

 

In 2022 the Federal limit for total dollars going into a 401(k) is $61,000 for individuals under 50.

The result is an additional $37,300 which can be contributed on an after-tax basis and immediately converted to Roth.

How Do You Make After-Tax Contributions to the Amazon 401(k)?

Amazon will let you contribute a percentage from each paycheck to your 401(k) over the course of the year up to the Federal limit. You will need to go into Fidelity Net Benefits to set your contributions.

A quick note about setting your contributions:

  • You can only enter a percentage, you cannot specify a certain dollar amount. To help ensure you make the most of your contribution be sure to round up your percentage to a whole number. For example, if 12.8% is your max contribution based on your salary, round up to 13%.

Contribution Considerations

The dollars you invest into your Mega Backdoor Roth are long-term dollars. If you have other large saving goals, such as saving for a down payment on a home or your children’s college tuition, you will need to allocate these short to mid-term dollars into different saving buckets (like a brokerage account).

If you decide to max out your 401(k) and Mega Backdoor Roth, that is ~$57,800 you are no longer receiving as part of your paycheck. Fortunately, the amount you want to contribute is totally up to you! You can look at your current situation and decide if you want to contribute $1,000, $10,000, or up to the Federal limit.

Supplementing Your Cash Flow Using Amazon Restricted Stock Units 

As an Amazon employee you receive Restricted Stock Units which can be sold once they vest. With careful financial planning you can sell these shares and use the proceeds for your day-to-day living expenses. This can free up cash from your salary to allocate towards your 401(k) and Mega Backdoor Roth.

How Does the Amazon Mega Backdoor Roth Help Reduce Taxes?

Many of you reading this are saving money above and beyond your 401(k) and more than likely you’re saving into a brokerage account (individual account, joint account, etc.). Within these accounts you hold investments, which inevitably over time kick off interest income, dividends, and capital gains. All of these events are taxable within brokerage accounts. Over the long-run, this taxation can create a substantial tax drag on performance.

Within a Roth you could hold the exact same investments, but the same interest income, dividends, and capital gains would all be tax-free now and when you retire!

Additionally, when you do retire, having additional money in a Roth account enables you to manage your retirement distributions and give you more control over your taxable income, which could allow you to save even more from a tax perspective.

If You are an Amazon Employee Saving Outside of Your 401(k) for the Long-Term – the Amazon Mega Backdoor Roth is a Benefit You Should Take Advantage Of

Needless to say, the long-term benefits of increasing your retirement savings, particularly by utilizing the Amazon Mega Backdoor Roth Conversion strategy, could make a massive positive impact on what your retirement looks like.

Questions About the Amazon Mega Backdoor Roth?

If you want to start taking advantage of the Amazon Mega Backdoor Roth Conversion, or any of the other benefits offered in the Amazon employee benefits plan, please schedule some time to discuss your questions.