2023 Updates for the Amazon Mega Backdoor Roth
In 2023, Amazon employees can contribute thousands to a Roth using the Mega Backdoor Roth provision within the Amazon 401(k). The Mega Backdoor Roth allows you to contribute after-tax dollars, up to the federal limit, and then convert those dollars to Roth.
The 2023 federal contribution limits for 401(k) plans are:
- $66,000 if you’re under 50
- $73,500 if you’re 50 or older
If you are already contributing the maximum amount to your Amazon 401(k), this is a fantastic way to save even more for retirement.
Tax-Free Growth on After-Tax Roth Contributions
You may have heard about the Amazon Mega Backdoor Roth, but you may not be fully aware of its benefits. The Mega Backdoor Roth provision is a way for high-income earners to contribute after-tax dollars to their 401(k) and then immediately convert these dollars to Roth.
One of the biggest advantages of Roth dollars is that your contributions and any interest or investment gains grow tax-free, and will also be tax-free when you access them in retirement. Having additional Roth money enables you to better manage your retirement distributions, giving you more control over future taxable income.
Amazon 401(k) Basics and the Amazon Employer Match
Before diving into the Mega Backdoor Roth, it may be helpful to understand the basics of the Amazon 401(k) plan and the Amazon employer match.
In 2023, you can contribute the following to your Amazon 401(k):
- $22,500 if you’re under 50
- $30,000 if you are 50 or older ($22,500 plus a $7,500 catch-up contribution). If you turn 50 in 2023, you are eligible for the catch-up contribution.
You can make these contributions on a pre-tax or Roth basis. The difference between a traditional and Roth 401(k) comes down to when you pay taxes.
Traditional Pre-Tax 401(k): “Pay the taxes later”
With a traditional pre-tax 401(k), you make your contributions before taxes. Your contributions do not count as income, reducing your taxable income for that year. However, distributions in the future will be taxed as ordinary income.
Roth 401(k): “Pay the taxes now”
With a Roth 401(k) you make your contributions after taxes. When you withdraw savings for retirement, you are not taxed.
Amazon Employer Match
Amazon will provide you with a 50% match on the first 4% contributed, meaning they will contribute 2% of your base salary to your 401(k). To receive the match, you must contribute at least 4%.
For example, if you’re making $325,000 and you put $22,500 into your 401(k), Amazon will contribute $6,500 as a match (2% of your base salary).
Amazon Mega Backdoor Roth Example
To illustrate how you can contribute thousands in after-tax contributions, let’s walk through a couple of examples. In our first example, an Amazon employee under 50 earns a base salary of $325,000 and maxes out their 401(k) contributions:
- 401(k) contribution: $22,500
- Amazon match (2% of salary): $6,500
The pre-tax contribution and Amazon match equal $29,000. They have not reached the federal limit of $66,000, meaning our example employee can contribute up to $37,000 in after-tax dollars and immediately convert those dollars to Roth.
For someone who is 50 or older, the federal limit increases. In the second example, our employee earns $350,000, and maxes out their 401(k):
- 401(k) contribution: $22,500
- 401(k) catch-up contribution: $7,500
- Amazon match (2% of salary): $7,000
The federal limit for 401(k) contributions is $73,500 if you’re 50 or older, meaning our example employee can contribute up to $36,650 in after-tax dollars and immediately convert those dollars to Roth.
Set Your 401(k) and After-Tax Contributions
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 NetBenefits to set your contributions.
A quick note about setting your contributions:
- You can only enter a percentage and cannot specify a certain dollar amount.
- To help ensure you make the most of your contribution, 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%.
How Much Should I Contribute?
The dollars you invest into your Mega Backdoor Roth are long-term dollars. If you decide to max out your 401(k) and Mega Backdoor Roth, that is ~$51,000 you are no longer receiving as part of your paycheck.
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).
Fortunately, the amount you want to contribute is totally up to you! You can look at your current situation and decide how much to contribute. It can be $1,000, $10,000, or any amount up to the federal limit.
Supplement Your Cash Flow Using Amazon Restricted Stock Units (RSUs)
As an Amazon employee you receive Restricted Stock Units. RSUs can be sold once they vest. With thoughtful planning you can sell these shares and use the proceeds for your day-to-day living expenses.
There are a couple of reasons to consider using this strategy. First, it helps you maintain a diversified portfolio. And second, it can free up cash from your salary to allocate towards your 401(k) and Mega Backdoor Roth.
Long-Term Benefits of the Amazon Mega Backdoor Roth
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 Benefits?
Schedule time with one of our advisors to discuss how to make the most of your Amazon benefits.