Microsoft Mega Backdoor Roth Conversion
Nick Wright | March 3, 2021
Updated for 2021.
The Mega Backdoor Roth 401(k) is one of the best employee benefits available to Microsoft employees. We want to help you understand how this benefit can help you invest more towards retirement and reduce some of your future tax liabilities. This video explains how the Microsoft Mega Backdoor Roth Conversion works and highlights what’s new in 2021:
THE NUMBERS BEHIND THE MEGA BACKDOOR ROTH CONVERSION
You probably know that within your Microsoft 401(k) you can contribute up to $19,500 per year if you’re under 50. Employees who are over 50 years old can contribute, an additional $6,500 a year ($26,000 total). Microsoft will match 50% of your total contribution, up to $9,750.
In order to take advantage of the Mega Backdoor Roth benefit, you must be contributing the maximum amount to your 401(k). In our example below we will walk through how this benefit works for someone under 50 years old, contributing $19,500 and receiving the full Microsoft match, $9,750.
Some of you may not know that there is a Federal limit for total dollars going into a 401(k). In 2021 this limit is $58,000 – meaning there is a difference of $28,750 after-tax dollars available for you to contribute to your 401(k). Now this is where you begin to see how powerful this benefit really is. Once you contribute the additional $28,750 into your 401(k), you can convert those same dollars to a Roth within the plan. This conversion occurs automatically anytime there is an after-tax contribution made.
IS THIS BENEFIT REALLY SO AMAZING THAT IT DESERVES ITS OWN VIDEO AND BLOG POST?
The answer is yes! Microsoft employees are able to take advantage of the Mega Backdoor Roth AND contribute $6,000 to a Roth IRA on the outside as well. This means you are able to contribute up to four and a half times more annually than most people because you are using the Mega Backdoor Roth.
Most companies and most 401(k) plans don’t include the Mega Backdoor Roth, however, we are beginning to see it become more common in the tech community. People without access to this benefit are only able to contribute $6,000 to a Roth, using a Roth IRA, on the outside of their 401(k) plan.
Hands down – the Mega Backdoor Roth is a fantastic way to invest towards your retirement and reduce future taxes!
HOW DOES THE MICROSOFT MEGA BACKDOOR ROTH REDUCE TAXES?
If you are saving money above and beyond your 401(k) 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 taxable events are reported annually to IRS on a 1099. 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 are tax-free now and when you retire.
Needless to say, the long-term benefits of increasing your retirement savings, particularly by utilizing the Microsoft Mega Backdoor Roth Conversion strategy, could make a massive positive impact on what your retirement looks like.
QUESTIONS ABOUT THE MICROSOFT MEGA BACKDOOR ROTH CONVERSION?
If you want to start taking advantage of the Mega Backdoor Roth Conversion, or any of the other benefits offered to Microsoft employees, please schedule some time with our team to discuss your questions. You can access our calendar HERE.
This content is for illustrative purposes only. Individual situations may vary. Please consult your tax advisor to determine if the scenarios discussed in this article are right for you. Investment Advisory services offered through Avier Wealth Advisors. Avier is not affiliated with Microsoft.