How does the Amazon Mega Backdoor Roth Conversion work?
Lars Phillips | March 6, 2020
To view a video explanation of the Amazon Mega Backdoor Roth Conversion, please check out the video below:
Amazon employees finally, starting in January 2020, have access to the Amazon Mega Backdoor Roth Conversion, also known as the after tax contribution to your 401(k) plan.
Let’s talk about what this means and why this might be important for you. We’ll also talk about why Amazon employees should take advantage of the Mega Backdoor Roth Conversion if they can.
The numbers behind the Mega Backdoor Roth Conversion
You probably know that within your Amazon 401(k) you can contribute up to $19,500 per year if you’re under 50, and an extra $6,500 per year if you’re over 50. We’re just going to concentrate on folks who are under 50 for this example.
If you max out your 401(k) with a $19,500 contribution, Amazon is going to provide you with a 50% match on your first 4% contributed, meaning that they will contribute 2% of your base salary to your 401(k). If you’re making the max Amazon base salary ($160,000) and you put $19,500 into your 401(k), then Amazon is going to contribute $3,200 as a match (2% of your base salary).
What you may not know, is that the Federal limit for total dollars going into a 401(k) in any given year is $57,000 as of 2020.
This is where the Mega Backdoor Roth comes into play. Amazon now allows you to contribute up to 10% of your base salary to the after-tax portion of your 401(k) and subsequently convert it to Roth. If you’re making $160,000 base, Amazon is going to essentially let you put in $16,000 over the course of the year. (Now that doesn’t technically mean that you can put in $16,000 no matter when you start. You’ll be allowed to put in up to 10% of your salary each respective paycheck.)
You’ll then need to get on the phone with Fidelity to make sure these after tax dollars are automatically being converted to Roth. As of early 2020 there is no default option to automatically convert these dollars unless you speak with a Fidelity representative.
For those of you who want to take advantage of this benefit, the sooner in the year that you start making these after-tax contributions the more you’ll be able to contribute.
How can the Amazon Mega Backdoor Roth Conversion help Amazon employees reduce taxes?
The reason that this is important is because if you’re going to save money above and beyond your 401(k), you’re probably going to save money into a brokerage account (for example an Individual account, a Joint with Rights of Survivorship Account, etc.). With these types of accounts you get taxed each and every year.
As an example, within a brokerage account, dividends, interest income, and capital gains get taxed every year which can lead to serious tax drag on performance, particularly over the long run. On the other hand if you save additional money into a Roth (like you can by utilizing the Mega Backdoor Conversion), now you’ve got these investments sitting in a bucket where dividends, interest income, and capital gains are all tax free.
Questions about the Amazon Mega Backdoor Roth Conversion?
If you’re an Amazon employee who wants 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 feel free to schedule a quick phone call by using the link below.
This content is for illustrative purposes only. Individual situations may vary. Please consult your tax advisor to determine if the scenarios discussed in this video are right for you. Investment Advisory services offered through Avier Wealth Advisors. Avier is not affiliated with Amazon.