This article about the Nike Mega Backdoor Roth has been updated for 2022 and includes current 2022 tax information.
Nike Mega Backdoor Roth Basics
The Mega Backdoor Roth 401(k) is one of the best employee benefits available to Nike employees. In this video we help you understand what the Mega Backdoor Roth is and how it can help you invest more towards retirement and reduce some of your future tax liabilities.
How Much Can You Contribute to the Nike Mega Backdoor Roth?
You probably know that within your Nike 401(k) you can contribute up to $ 20,500 per year if you’re under 50. Employees who are 50 years old and older can contribute an additional $6,500 a year ( $27,000 total).
- Under 50 years old: $20,500
- 50 years or older: $27,000
What is Nike’s Employer Match?
Nike will match 5% of your annual salary as long as you contribute at least that amount to your 401(k). We call this match “free money” – you will want to make sure you are contributing at least 5% of your salary to ensure you receive the match from Nike.
What is the Nike Mega Backdoor Roth?
This provision within your 401(k) allows you to contribute after-tax dollars, up to the Federal limit, and convert those dollars to Roth. In 2022, the Federal limit is $61,000 for individuals under 50, and $67,500 for those 50 and over. Your after-tax dollars grow tax-free rather than tax-deferred which could have a positive impact on taxable distributions in retirement. Nike allows you to contribute 3% of your annual salary with a maximum of $8,700, into the Mega Backdoor Roth.
Let’s walk through an example of how the Mega Backdoor Roth works for an employee who is under 50 years old, earning $200,000/year, and contributing $20,500 to their 401(k) – which makes them eligible to receive the full Nike match of $10,000.
- Salary: $200,000
- 401(k) Contribution: $20,500
- Nike Employer Match: $10,000
The Mega Backdoor Roth feature within your Nike 401(k) enables our example employee to contribute some of their after-tax dollars into their 401(k) and convert those dollars to a Roth. In this example our employee can contribute an additional $6,000 and convert those same dollars to a Roth within the plan. This process is not automatic—you will need to call the Nike 401(k) phone line to request the conversion.
Mega Backdoor Roth Contribution Considerations
We encourage you to contribute the maximum amount to your 401(k) before contributing to the Mega Backdoor Roth. This way, you receive the full employer match on the first $20,500 you contribute.
You will also want to think through your cash-flow needs and long-term savings goals. If you decide to decide to contribute up to the maximum that Nike allows, that is $8,700 a year, you are no longer receiving as part of your paycheck. The dollars you invest into your Mega Backdoor Roth are long-term dollars that should not be accessed until retirement. Consider your other large saving goals, such as saving for a down payment on a home or your children’s college tuition, as you will need to allocate these short to mid-term dollars into different saving buckets (like a brokerage account).
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, $2,000, or up to the maximum allowed by Nike.
Will Contributions to the Nike Mega Backdoor Roth Reduce Taxes?
Contributing to the Nike Mega Backdoor Roth can be a strategy to help you reduce future tax liabilities. 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 in retirement! 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.
Is the Mega Backdoor Roth Conversion the Right Strategy for You?
We think the Mega Backdoor Roth is a fantastic way to invest towards your retirement and reduce future taxes. Most companies and most 401(k) plans don’t include the Mega Backdoor Roth; however, we are beginning to see it become more common and we encourage employees who have access to this tool to consider incorporating this into their financial plan.
Questions About the Nike Mega Backdoor Roth?
We have years of experience working with Nike executives and employees within the tech industry (Microsoft, Amazon, Intel, etc.) helping them understand and leverage their complex compensation benefits. We offer an integrated set of financial planning services to help you maximize your wealth while growing your own understanding of your assets, compensation, and pursuing your long-term financial goals