The enormous entryway Roth IRA is a strategy ConocoPhillips's 'highly compensated employees' (HCEs) can use to increase retirement savings and shield investment growth from retirement taxes.
According to a recent study conducted by the Employee Benefit Research Institute (EBRI) in 2022, it was found that individuals aged 60 and older who have a Mega Backdoor Roth IRA in place tend to have higher retirement savings and potentially enjoy a more tax-efficient retirement. The study revealed that retirees with a Mega Backdoor Roth IRA were able to maximize their after-tax contributions, resulting in a substantial increase in their Roth assets and potential tax-free growth over time. This strategic approach can be particularly beneficial for ConocoPhillips workers in their 60s who are looking to optimize their retirement savings while minimizing their tax burden.
Let's begin with the fundamentals.
Retirement Savings 101
When you choose to make Roth contributions, you will deposit after-tax dollars into your account. This means that you will pay taxes on the money in the year it is earned, and you will not receive any tax benefits for your contribution.
In exchange, you will not owe taxes on your contributions or future withdrawals. In addition, as long as your Roth contributions have 'matured' for at least five years, any earnings they generate will not be subject to taxation. (However, if ConocoPhillips made any contributions, you will still be required to pay taxes on those contributions when you withdraw, as you will not have already paid taxes on them. ConocoPhillips's contributions are always traditional, tax-deductible contributions.)
Limits for 2022 have changed since last year. A person under the age of 50 is eligible to contribute $20,500 to their 401(k). People aged 50 and older may contribute an additional $6,500 annually in catch-up contributions to their 401(k), for a total of $27,000. Limits for total employee and employer contributions have also increased over the past year and now stand at $61,000 (or $67,600 for individuals aged 50 and older).
Some company 401(k) plans permit after-tax contributions, creating a 'mega backdoor' through which you can invest up to an additional $40,500 in your Roth IRA or Roth 401(k).
We'll explain how it works and whether or not it's a good move for you, but you should be aware that this is complex and advanced financial planning with the potential for unexpected tax bills; you should absolutely consult an expert on this one.
Is a Mega Backdoor Roth Possible?
There are two prerequisites; if you are uncertain about either, contact HR or the administrator of your ConocoPhillips plan.
1. You must be able to make after-tax contributions to your 401(k). Not all 401(k) plans permit contributions after taxes. Quick vocab lesson: After-tax contributions are a distinct category from pre-tax and pre-tax contributions. (We've previously mentioned how after-tax and post-tax were once confused.)
2. In addition, your 401(k) plan must permit in-service withdrawals and Roth conversions. In-service withdrawals (also known as in-service distributions) allow you to transfer funds from your 401(k) to a Roth IRA while you are still employed by ConocoPhillips. In-plan conversions allow you to convert your after-tax 401(k) contribution to Roth dollars.
Mega Backdoor Roth IRA Pros
- Due to the dollar quantities involved, this strategy can significantly impact your overall retirement savings and tax-free Roth asset pool. Even if ConocoPhillips only allows this for a few years, it may still be worthwhile if it makes sense given your overall financial situation.
- If the entire massive backdoor Roth strategy is well-planned, it can be relatively simple for an individual to implement.
Mega Backdoor Roth IRA Cons
- Most individuals lack the flexibility to leverage this strategy's benefits, particularly on an after-tax basis.
- Even if individuals have the ability to implement this strategy, it may not be effective at the plan level. Your ConocoPhillips-sponsored 401(k) plan must satisfy a number of testing requirements. This includes the participation of 'highly compensated employees' or HCEs in comparison to 'non-highly compensated employees' or NHCEs. Logic dictates that if only HCEs make after-tax contributions, the plan may be required to return a portion of the contributions to HCE participants if it fails the test.
How a Mega Backdoor Roth Works
The precise limit on a contribution plan such as a 401(k) is quite high: $61,000 (or $67,500 for those 50 and older) in 2018. This maximum number is comprised of the $20,500 (or $27,000) employee elective deferral amount, as well as any matching contributions from ConocoPhillips, profit-sharing, and your after-tax contributions.
Using the massive backdoor strategy, you transfer all of your after-tax 401(k) contributions to a Roth IRA or to Roth dollars within your 401(k) before the funds can earn investment returns. Due to IRS nondiscrimination tests, there are also situations in which a company's highest-earning employees cannot contribute the maximum amount after taxes. If withdrawn from a Roth-style account, the money will grow tax-free rather than tax-deferred, meaning neither you nor your beneficiaries will owe taxes on the earnings. Pretty cool.
In-service withdrawals or conversions are one of the requirements, as speed is crucial. You do not want to wait until you depart ConocoPhillips to transfer that sum of money.
NOTE: If you leave it in your 401(k) as an after-tax contribution, it will accrue taxable earnings the entire time.
Manually completing the process is difficult, and we are here to help.
Consider a scenario in which a missed in-service withdrawal or in-plan conversion has accrued earnings. Certainly not the end of the universe. The IRS confirms that you can transfer the contribution portion to a Roth IRA and the gains portion to a traditional IRA, which requires some effort but preserves the favorable tax status of your contribution.
Calculate Your After-Tax Contribution Amount
You'll note that we repeatedly refer to 'up to $40,500' in additional contributions; this is because each individual's amount after taxes may vary. To make up the difference between the standard employee contribution amount of $20,500/$27,000 and the maximum limit of $61,000/$67,500, you must account for any ConocoPhillips matching and profit-sharing along the way.
Let's examine a few straightforward scenarios.
Henry, 57
Age-based maximum cap: $67,500
Salary: $100,000
Profit-sharing: 25% of compensation
At 56, Henry has greater potential. Henry has capacity for after-tax contributions of $15,500 if he contributes the maximum $27,000 and receives the maximum $25,000 from his employer.
Nancy, 44
Age-based maximum cap: $61,000
Salary: $100,000
Up to 3 percent of remuneration is matched by the employer
If Nancy contributes the maximum of $20,500 and her employer matches $3,000, she has capacity for $37,500 in after-tax contributions.
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Age-based maximum: $67,500 for Jason (60 years old).
Maximal annual contributions to both his 401(k) ($27,000 in 2022) and IRA ($7,000 in 2022). He wants to save even more by contributing to a mega backdoor Roth IRA, but he also wants to know the utmost after-tax contribution he can make to his 401(k) plan. If his total annual employer contributions are $10,000 in 2022, Jason can contribute up to $30,500 after taxes this year. John would transfer his after-tax contributions to his Roth 401(k) or Roth IRA, allowing him to deposit an additional $30,500 in a Roth account with tax-free growth, assuming his 401(k) plan has the necessary provisions.
Some 401(k) plans limit the amount of after-tax contributions, so even if you have the ability to contribute more, you may not be able to. There are also situations in which a company's highest earners cannot maximize their after-tax contributions due to IRS nondiscrimination tests. These tests are designed to ensure that those earning the most are not saving at a higher rate than the rest of the organization.
And it bears repeating that after-tax contributions are not deductible, and if left in the 401(k) plan rather than being transferred into a Roth-style account, the earnings could be taxed upon withdrawal.
When to contemplate a mega backdoor Roth 401(k)
Mega backdoor Roth IRAs are an intriguing option for high-income ConocoPhillips employees seeking additional retirement and higher savings options. It is worthwhile to consult a financial planner if:
- You've exhausted out your personal 401(k) contributions. This precedes that. When you've reached your contribution limit and still have more money to save, you can contemplate a mega backdoor strategy.
- You desire to save additional funds for retirement. Mega backdoor Roth IRAs are an excellent method to save money each year. Still, there are a variety of additional financial strategies to consider, such as time horizon and liquidity.
Conclusion
Imagine stumbling upon a well-hidden vault filled with confidential financial strategies. Just as this vault holds exclusive insights, a Mega Roth IRA presents a valuable opportunity for high-income ConocoPhillips employees approaching retirement. By strategically leveraging after-tax contributions, they can amass a wealth of tax-free growth and earnings within their Roth IRA. Just as the secure vault ensures the protection of valuable assets, the Mega Roth IRA safeguards their retirement funds, providing a prosperous and secure future for those who delve into its specialized knowledge.
Source:
- What to do with an Early Retirement Ebook
- RSUs Essential Facts (Schwab.com, 2022)
- The Mega Backdoor Roth Too Good To Be True?' (Forbes.com, 2022)
- Social Security Ebook
- Lump Sum vs. Annuity Ebook
- 401(k) Rollover Strategies Ebook
- Closing the Retirement Gap Ebook
How long must ConocoPhillips workers maintain the withdrawals?
The payments must continue for a minimum of five years or until you reach age 59 and a half, whichever is lengthier.
How frequently must ConocoPhillips employees make withdrawals?
ConocoPhillips employees are required to accept the payments on an annual basis.
Can ConocoPhillips workers initiate 72(t) payments from their 401(k)?
The 72(t)-payment plan is applicable only to the IRA or IRAs from which the initial payment was calculated. Depending on your requirements, you can split your IRA into two IRAs prior to establishing a 72(t)-payment plan. One IRA can be used to calculate and withdraw 72(t) payments, while the other remains available for non-72(t) purposes.
How do ConocoPhillips employees determine payment amounts?
Three methods have been approved by the IRS for calculating 72(t) payments. The required minimum distribution (RMD) method, the amortization method, and the annuity factor method are these methods. The RMD method will initially generate lesser payments than the other two methods. Although other methods of calculating the payments are not strictly prohibited, it would be exceedingly risky to use a method that has not been approved by the IRS. Generally, you should consult a tax or financial advisor when calculating your 72(t) payments.
After beginning 72(t), can ConocoPhillips employees alter their method?
You can transition from the amortization or annuity factor method to the RMD method. This is a one-time, irreversible change, and the RMD method must be used for the remainder of the schedule.
Can ConocoPhillips workers cancel their 72(t) payments?
If you do not adhere to your 72(t)-payment plan or if you modify the payments, the 10% penalty exemption will no longer apply. Even worse news: the 10% penalty will be reinstated retroactively for all distributions taken prior to age 59 1/2.
Can ConocoPhillips employees take 72(t) additional withdrawals in the event of an emergency?
A supplemental withdrawal is regarded as a change to the payment schedule. Any change in the account balance that is not the result of regular gains and losses or 72(t) distributions will also be regarded as a modification and will trigger the 10% penalty. This indicates that neither rollovers nor contributions can be used to fund an IRA. You cannot convert or rollover your 72(t) payments.
Conclusion
In the realm of financial strategies, ConocoPhillips employees nearing retirement can approach the 72(t) rule with the finesse of a seasoned conductor leading an orchestra. Similar to how a conductor carefully orchestrates the harmony among musicians, understanding and implementing the provisions of the 72(t) rule requires meticulous planning and coordination. By conducting their financial moves with precision, these employees can navigate the complexities of early withdrawals from their retirement accounts, ensuring a harmonious balance between accessing funds and avoiding penalties. Just as a conductor guides a symphony to create a masterpiece, a well-executed 72(t) strategy can lead to a harmonious and secure retirement journey.
How does the retirement process at ConocoPhillips provide guidance to employees in selecting the most beneficial form of payment? In what ways can employees utilize available resources to maximize their understanding of the pension options offered by ConocoPhillips?
The retirement process at ConocoPhillips provides employees with various resources to guide them in selecting the most beneficial form of pension payment. Employees can access the "How to Choose the Best Form of Payment" link on Your Benefits Resources™ (YBR) to learn more about their options and determine what works best for their financial situation(ConocoPhillips_Your_Ret…).
What steps must be completed by employees at ConocoPhillips to ensure they initiate their retirement process accurately and avoid any delays? How crucial is the timing of these steps in determining the Benefit Commencement Date (BCD)?
Employees at ConocoPhillips must initiate the retirement process by requesting their pension paperwork 60-90 days before their Benefit Commencement Date (BCD). Timing is crucial, as missing deadlines may delay the BCD and associated payments. Completing all steps on time ensures that the retirement process flows smoothly(ConocoPhillips_Your_Ret…).
Given the complexities associated with the lump-sum pension payment option at ConocoPhillips, what considerations should employees take into account before electing this choice? How does the current interest rate at the Benefit Commencement Date impact the lump-sum amount?
Before electing a lump-sum pension payment, ConocoPhillips employees should consider the current interest rate at their BCD, as it directly affects the lump-sum amount. A higher interest rate typically reduces the lump-sum payment, making timing and rate awareness critical(ConocoPhillips_Your_Ret…).
In what ways can ConocoPhillips employees ensure their Pension Election Authorization form is completed correctly to facilitate timely pension payments? What are the implications of not adhering to the required notarized consent for married participants?
Ensuring the correct completion of the Pension Election Authorization form is vital for timely pension payments. For married participants, notarized spousal consent is required, and failure to provide this could result in delays or issues with payment processing(ConocoPhillips_Your_Ret…).
How does choosing direct deposit for pension payments at ConocoPhillips streamline the retirement process for employees? What should employees know about setup and changes regarding direct deposit after initiating their pension benefits?
Choosing direct deposit for pension payments simplifies the process for employees at ConocoPhillips, as it enables automatic payments to their bank account. Employees can set up direct deposit during their retirement process or update it at a later time(ConocoPhillips_Your_Ret…).
For employees considering rolling over their lump-sum pension payment from ConocoPhillips, what procedures should they follow to ensure compliance with IRS regulations and to avoid tax penalties? How can effective planning influence the success of this rollover?
Employees electing to roll over their lump-sum pension payment must follow specific IRS regulations to avoid tax penalties. Effective planning, such as obtaining rollover paperwork and adhering to IRS rules, ensures compliance and smooth fund transfer(ConocoPhillips_Your_Ret…).
What resources does ConocoPhillips provide for employees to calculate and project their retirement income? How can these tools empower employees to make informed decisions regarding their future financial security?
ConocoPhillips provides employees with tools such as the "Project Retirement Income" feature on YBR, empowering them to calculate and project their retirement income. These resources help employees make informed decisions about their financial future(ConocoPhillips_Your_Ret…).
How do deadlines play a pivotal role in the benefits process for retiring employees at ConocoPhillips, and what specific dates must be adhered to in order to avoid payment delays? Can you provide examples of consequences resulting from missed deadlines?
Deadlines are critical in ConocoPhillips' retirement process, as missing them can delay pension payments. For example, requesting pension paperwork after the 15th of the month can delay the BCD by a month, affecting the pension payout date(ConocoPhillips_Your_Ret…).
What are the added advantages for employees at ConocoPhillips who actively seek assistance or information from the Benefits Center during their retirement planning? How can this proactive approach enhance their overall retirement experience?
Employees who seek assistance from the Benefits Center during their retirement planning benefit from personalized guidance. This proactive approach ensures that they fully understand their options and deadlines, enhancing their overall retirement experience(ConocoPhillips_Your_Ret…).
How can employees at ConocoPhillips contact the Benefits Center to receive personalized assistance in navigating their retirement options? What specific resources and support can they expect when reaching out for help?
ConocoPhillips employees can contact the Benefits Center by calling 800-622-5501 or accessing YBR online. The Benefits Center provides personalized assistance and guidance, helping employees navigate their pension options effectively(ConocoPhillips_Your_Ret…).
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