New Update: Healthcare Costs Increasing by Over 60% in Some States. Will you be impacted?

Unlocking the Benefits of a Mega Roth IRA for Vistra Employees: A Pathway to Enhanced Retirement Savings

Healthcare Provider Update: Offers medical, dental, vision, life, disability, telemedicine, and TRICARE supplement plans, plus HSAs and FSAs 8. With ACA subsidies expiring, Vistras benefitsincluding 100% employer-paid optionsoffer significant financial advantages over marketplace plans. Click here to learn more

The mega backdoor Roth IRA is a strategy ‘highly compensated employees’ or HCEs at Vistra can use to increase retirement savings and shelter investment growth from taxes in retirement.

When circumstances are right and the stars align, this little-known strategy can be a smart way to tuck extra money into a Roth IRA to use for retirement or to save for your heirs.

Let’s start with the basics.

Retirement Savings 101

When you choose to make Roth contributions, you’ll contribute to your account with after-tax dollars. This means you will pay taxes on the money the year it is earned, and you won’t benefit from any tax advantages at the time you contribute.

In exchange, you won’t owe any taxes on your contributions or when you withdraw in the future. Additionally, as long as your Roth contributions have “aged” for at least five years, any earnings your contributions accrue won’t be taxed either. (That said, if Vistra made any contributions, you’ll still need to pay taxes on those when you withdraw, since you won’t have paid taxes on those contributions yet. Contributions made by Vistra are always traditional, pre-tax contributions.)

The 2022 limits have changed since last year. A person younger than 50 can contribute $20,500 into their 401(k). People who are aged 50 and older can contribute an additional $6,500 annually in catch-up contributions, for a total of $27,000 into their 401(k). Limits for total employee and employer contributions have also increased over the past year and are $61,000 (or $67,600 for people 50 and older).

Some company 401(k) plans are structured to allow for additional after-tax contributions, which can create a “mega backdoor” through which you can invest up to an extra $40,500 into your Roth IRA or Roth 401(k).

We’ll walk you through how it works and if it’s a good move for you, but know now that this is complicated and advanced financial planning with the potential for some unexpected tax bills—definitely work with an expert on this one.

Is a Mega Backdoor Roth Possible ?

There are two prerequisites — if you’re unsure about either, double-check with HR or contact your Vistra-plan administrator.

Your 401(k) plan must allow for after-tax contributions. Not all 401(k) plans let you make after-tax contributions. Quick vocab lesson: after-tax is an entirely different contribution category from pre-tax and post-tax. (We’ve mentioned before how after-tax and post-tax used to be conflated.)
Your 401(k) plan must also allow for in-service withdrawals or in-plan Roth conversions. In-service withdrawals (also called in-service distributions) enable you to take money out of your 401(k) while you’re still employed with Vistra and roll it into a Roth IRA. In-plan conversions let you move your after-tax contribution into Roth dollars within the 401(k).

Featured Video

Articles you may find interesting:

Mega Backdoor Roth IRA Pros

Due to the dollar amounts, this strategy can really move the needle in your overall retirement savings and tax-free Roth asset bucket. Even if Vistra only permits this for a few years, it can still be worthwhile, assuming it makes sense in the context of the rest of your financial situation
If you can keep the entire mega backdoor Roth strategy in-plan, it can be fairly easy to execute for the individual.

Mega Backdoor Roth IRA Cons

Most individuals don’t have the flexibility to maximize the benefits of this strategy, especially on an after-tax basis.
Even when individuals have the means to use this strategy, it might not work at the plan level. Essentially, your Vistra-sponsored 401(k) plan must pass various testing requirements. This includes participation from ‘highly compensated employees’ or HCEs relative to ‘non-highly compensated employees’ or NHCEs. If only the HCEs are making after-tax contributions (as stands to reason), the plan may be forced to return a portion of the contributions to HCE participants if it fails the test.

How a Mega Backdoor Roth Works

The real limit on a contribution plan such as a 401(k) is actually pretty high: this year, it’s $61,000 (or $67,500 for people 50 and older). That max amount includes the $20,500 (or $27,000) employee elective deferral amount we’re most familiar with, as well as any matching contributions from Vistra, profit-sharing, and your after-tax contributions.

When you use the mega backdoor strategy, you take all the money from the after-tax contribution to your 401(k) and quickly transfer it into either a Roth IRA or to Roth dollars within your 401(k) before it can accrue investment earnings. There are also some instances where a company’s highest earners wouldn’t be able to max out their after-tax contributions due to IRS nondiscrimination tests . If available once it’s in a Roth-style account, the money will grow tax- free instead of tax- deferred , which means you won’t end up owing taxes on those earnings, and neither will your beneficiaries. Pretty nifty.

Speed is key, which is why in-service withdrawals or in-plan conversions is one of the requirements. You don’t want to have to wait until you leave Vistra to move that chunk of money.

NOTE: If you leave it as an after-tax contribution in your 401(k), it’s going to be accruing taxable earnings the whole time.

Doing the process manually is complicated, and we are here to assist.

Say you miss an in-service withdrawal or in-plan conversion and you’ve accrued some earnings. Not the end of the world. The IRS confirms you can shift the contribution portion into a Roth IRA and the gains portion into a traditional IRA, which takes some work, but you’ll preserve your contribution’s beneficial tax status.

Calculate Your After-Tax Contribution Amount

You’ll notice that we keep saying “up to $40,500” in additional contributions—that’s because everyone’s after-tax amount could be different. If you’re trying to make up the difference between the $20,500/$27,000 standard employee contribution amount and the $61,000/$67,500 max limit, you have to account for any matching by Vistra and profit-sharing along the way.

Let’s walk through a couple of simple scenarios.

Henry, 57

Max limit, based on age: $67,500

Salary: $100,000

Profit-sharing: 25 percent of salary

At 56, Henry has higher limits. If he maxes out his $27,000 employee contribution and gets $25,000 from his employer, Henry has room for $15,500 in after-tax contributions.

Nancy, 44

Max limit, based on age: $61,000

Salary: $100,000

Employee matching: Up to 3 percent of salary

If Nancy maxes out the $20,500 employee contribution, and her company matches $3,000, that means Nancy has room for $37,500 in after-tax contributions.

Jason (60 years old)

Max limit, based on age: $67,500

Contributes the maximum annual amount to both his 401(k) ($27,000 in 2022) and his IRA ($7,000 in 2022). He is looking to save even more by using a mega backdoor Roth IRA contribution, but he wants to know the maximum amount of after-tax contributions he can put into his 401(k) plan. If his total annual employer matching contributions are $10,000 in 2022, Jason can make after-tax contributions of up to $30,500 this year. Assuming his 401(k) plan has the appropriate provisions, John would transfer his after-tax contributions to his Roth 401(k) or Roth IRA, allowing him to place an additional $30,500 in a Roth account receiving tax-free growth.

One caveat: Some 401(k) plans do limit the amount you can contribute after-tax, so even if you have room to contribute more, you might not be able to. There are also some instances where a company’s highest earners wouldn’t be able to max out their after-tax contributions due to IRS nondiscrimination tests , which are designed to ensure those earning the most aren’t saving at a higher rate than everyone else in their organization.

And it bears repeating after-tax contributions aren’t deductible, and if left in the 401(k) plan instead of being shifted into a Roth-style account, the earnings could be taxed when withdrawn.

When you should consider a mega backdoor Roth

Mega backdoor Roths are an interesting option for high earners at Vistra looking for additional ways to save for retirement or for their heirs. It’s worth exploring with your financial planner if:

You’ve maxed out your personal 401(k) contributions. That comes first. When you’ve maxed out your contributions and still have more to save, you can consider going for a mega backdoor strategy.
You have additional funds you want to save for retirement. Mega backdoor Roths are a great way to store away cash every year. Still, there are many other financial strategies to consider, and things like time horizon and liquidity are important considerations.

How does the eligibility criteria for participation in the Vistra Operations Company pension plan differ for represented and non-represented employees? Specifically, what factors should an employee of Vistra Operations Company consider in understanding whether they qualify for the PRB Structure of the Plan based on their employment agreements and status?

Eligibility Criteria for Represented and Non-Represented Employees: The Vistra Operations Company pension plan has distinct eligibility criteria for represented and non-represented employees. Non-represented employees hired or rehired on or after January 1, 2019, are not eligible to participate in the plan, as their benefits were frozen effective December 31, 2018. Represented employees are subject to their collective bargaining agreements, and their participation may vary depending on the terms of those agreements(Vistra_Operations_Compa…).

What steps should an employee at Vistra Operations Company take if they wish to contest a denial of benefits they believe they are entitled to under the plan? Please outline the procedures outlined in the document that the employees must follow to ensure their rights under the Employee Retirement Income Security Act are upheld.

Contesting a Denial of Benefits: Employees must file a written claim for benefits if they believe they were denied benefits under the plan. The plan administrator reviews the claim, and if it is denied, the employee has the right to request a review of the denial within 60 days. Employees can provide additional documentation and will receive a final decision within 60 to 120 days depending on circumstances. If the claim is denied after review, the employee has the right to file a civil action under ERISA(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

For employees of Vistra Operations Company who are nearing retirement age, what options do they have concerning their pension benefits, and how can they make the most informed decision regarding the form of payment they choose? What factors specific to their circumstances and relation to the plan should they consider, such as marital status or previous employment benefits?

Options for Employees Nearing Retirement: Employees nearing retirement have several options for receiving their pension benefits, including single life annuity or joint and survivor annuity payments. Factors such as marital status, existing benefits, and personal financial circumstances will affect their decision. For instance, married employees may elect a joint and survivor annuity, which provides reduced monthly payments during their lifetime and continues to pay a portion to their spouse after their death(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

In what ways does the Vistra Operations Company pension plan accommodate employees transitioning from another employer's retirement plan, particularly with frozen benefits under an acquired plan? Employees should consider how these changes could impact their retirement outcomes and what steps are needed to integrate these benefits.

Transitioning from Another Employer’s Retirement Plan: Employees who transition from another employer’s retirement plan, especially those whose benefits have been frozen under an acquired plan, may still be eligible for interest credits on their account balances. The plan allows these employees to continue receiving interest credits while their account remains in the plan, preserving the value of their retirement savings(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

How can employees of Vistra Operations Company name a beneficiary in relation to their retirement benefits, and what specific requirements must be met to ensure that the designation is legally valid? Discuss the implications for both the employees and their chosen beneficiaries, including any necessary consents or notarizations.

Naming a Beneficiary: Employees can designate a beneficiary for their pension benefits, and if they are married, their spouse must provide notarized consent if they choose someone else as their beneficiary. It is important to update this information following life changes, such as marriage or divorce, to ensure benefits are distributed according to their wishes(Vistra_Operations_Compa…).

What provisions are in place within the Vistra Operations Company pension plan for employees who become disabled before reaching retirement age? Employees should understand how disability benefits interact with their retirement benefits and what criteria they must meet to access these provisions.

Provisions for Disabled Employees: Employees who become disabled before reaching retirement age may still be eligible for 100% vesting in their pension benefits. The plan recognizes disability as a qualifying event for full vesting if the employee receives Social Security disability benefits(Vistra_Operations_Compa…).

How does the annual interest crediting rate for defined benefit plans apply to employees of Vistra Operations Company, and what recent adjustments have been implemented that might affect their retirement savings? Review the specifics in relation to current economic indicators affecting these plans.

Annual Interest Crediting Rate: For defined benefit plans, the interest crediting rate is based on the 30-year Treasury securities rate, which can affect employees’ retirement savings. Represented employees may be subject to minimum interest credit rates depending on their collective bargaining agreements, while non-represented employees' interest credits continue even after benefits were frozen(Vistra_Operations_Compa…).

What are the implications of being classified as a non-represented employee under the Viesta Operations Company pension plan, especially considering the plan was frozen for them starting January 1, 2019? Employees should evaluate how this classification impacts their retirement planning and options moving forward.

Impact of Being a Non-Represented Employee: Non-represented employees had their benefits frozen as of December 31, 2018. This freeze means they no longer accrue new benefits, but they may still receive interest credits on their existing frozen benefit. Employees in this classification should evaluate alternative retirement savings options moving forward(Vistra_Operations_Compa…).

Could you explain the importance of the â€œnormal retirement ageâ€ and how it affects the pension benefits for participants in the Vistra Operations Company pension plan? Illustrate how this age plays a significant role in defining eligibility and benefit calculations.

Importance of "Normal Retirement Age": The normal retirement age under the plan is 65. This age is critical because it affects when employees become eligible for their full pension benefits without reduction, which plays a significant role in the calculation and payment of benefits(Vistra_Operations_Compa…).

What are the best ways for employees of Vistra Operations Company to contact the Plan Administrator to obtain additional information about their pension benefits and claims? Provide details on the resources available and the recommended channels for reaching out effectively, particularly regarding any changes in address or personal details affecting their benefits. These questions are designed to guide employees through the retirement process and help them navigate the specifics of their pension plan under Vistra Operations Company.

Contacting the Plan Administrator: Employees can contact the Vistra Pension Center for information regarding their pension benefits. They can reach the center at 1-855-568-4146 or online at http://ypr.aon.com/Vistra for assistance with questions or changes to their personal details(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).