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

The mega backdoor Roth IRA is a strategy ‘highly compensated employees’ or HCEs at Windstream Holdings 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 Windstream Holdings 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 Windstream Holdings 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 Windstream Holdings-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 Windstream Holdings and roll it into a Roth IRA. In-plan conversions let you move your after-tax contribution into Roth dollars within the 401(k).

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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 Windstream Holdings 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 Windstream Holdings-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 Windstream Holdings, 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 Windstream Holdings 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 Windstream Holdings 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 Windstream Holdings 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.

What are the implications of the Windstream Pension Plan for employees who wish to retire early, specifically regarding the eligibility criteria and benefit calculations that will affect their financial planning? How does Windstream address concerns for employees who may be contemplating retirement before reaching the defined Normal Retirement Age of 65?

Early Retirement and Financial Planning: Employees may retire early at age 55 with 20 or more years of service, though the pension benefit will be reduced. The reduction is by 1/180th for the first 60 months and 1/360th for each of the next 60 months that commencement precedes the normal retirement date of age 65. This ensures early retirees can still receive benefits, though at a lower amount than if they had waited until age 65(Windstream_Pension_Plan…).

In what ways does the Windstream Pension Plan protect the interests of employees during a potential plan termination? Specifically, how does the plan ensure that accrued benefits are preserved and what procedures are in place to inform employees about their rights under the Employee Retirement Income Security Act of 1974 (ERISA)?

Plan Termination Protections: In the event of plan termination, Windstream ensures all accrued pensions are fully vested. The plan assets will be used exclusively to meet accrued pension obligations before any surplus may revert to the company. Participants are also protected by the Pension Benefit Guaranty Corporation (PBGC), which guarantees most pension benefits(Windstream_Pension_Plan…).

How does Windstream determine the necessary contributions to the Pension Plan, and what role does an independent actuarial assessment play in this process? Additionally, how does this funding approach impact the overall financial stability of the Windstream Pension Plan and the benefits it promises to its participants?

Contribution Determination and Actuarial Role: Windstream’s contributions to the pension plan are determined by an independent actuary who evaluates the plan annually to recommend adjustments based on experience. This approach ensures that the plan remains financially stable and capable of meeting its promised benefits(Windstream_Pension_Plan…).

What options are available to employees of Windstream regarding the forms of pension benefit payouts upon retirement, and how do these options like the Joint and Survivor Annuities differ in terms of financial implications for both the retiring employee and their spouse?

Benefit Payout Options: Windstream offers several pension payout options, including Joint and 100% Survivor Annuity, Joint and 50% Survivor Annuity, and a 10-Year Certain and Life Annuity. These options differ in terms of the benefit reduction applied to ensure payments continue for the life of the spouse, impacting both the retiree’s and the spouse’s financial planning(Windstream_Pension_Plan…).

How should Windstream employees approach the process of claiming pension benefits, especially if their claims have been denied? What recourse is available for employees who are facing issues with their pension claim and wish to understand their rights and the appeal process?

Claiming Pension Benefits and Denied Claims: If an employee's pension claim is denied, they will receive a written notice explaining the reasons for the denial and the specific plan provisions involved. Employees may appeal the decision within 60 days, and the appeal process must be completed within 60 days of the request, with the right to file a civil lawsuit if necessary(Windstream_Pension_Plan…).

Given the frozen status of the Windstream Pension Plan, what should employees understand about their service years and how these years contribute to their pension benefits? How does Windstream communicate these rules to ensure clarity among its employees?

Service Years and Frozen Status: Since the Windstream Pension Plan is frozen, no additional benefits accrue after December 31, 2007. However, employees continue to earn years of service, which count toward eligibility for early retirement and vesting. Windstream provides clear communication through its summary plan description and resources to ensure employees understand these rules(Windstream_Pension_Plan…).

What strategies can Windstream employees employ to maximize their pension benefits and ensure they are making informed decisions about their retirement? How does Windstream support its employees in accessing the necessary resources and information to facilitate effective retirement planning?

Maximizing Pension Benefits: Employees are encouraged to consider their timing of retirement carefully, as delaying retirement closer to the normal retirement age of 65 reduces benefit reductions. Windstream supports retirement planning through its pension resources and access to Merrill Service Representatives who can assist with planning tools(Windstream_Pension_Plan…).

How does Windstream ensure that employees are aware of their obligations under the plan regarding the filing of claims and maintaining updated personal information? What measures does the company take to keep communication channels open for any inquiries or updates employees might need?

Maintaining Updated Information: Windstream emphasizes the importance of keeping personal information up to date, including changes to contact information. Employees are responsible for filing claims in a timely manner, and failure to do so may result in delays or forfeiture of benefits(Windstream_Pension_Plan…).

In the event of the death of a vested Windstream employee, what benefits are guaranteed to eligible spouses under the plan, and how do survivors initiate the process for claiming these benefits? What steps should surviving spouses take to ensure they receive the necessary support and information from Windstream?

Survivor Benefits and Claim Process: In the event of the death of a vested employee, the spouse is entitled to receive a pre-retirement survivor annuity, which may start on or after the employee’s earliest retirement age. The spouse must contact Windstream to initiate the claim process and may receive a lump sum if the benefit’s present value is below certain thresholds(Windstream_Pension_Plan…).

How can Windstream employees reach out to the companyâ€™s Benefits Committee or Plan Administrator for detailed inquiries about their pension benefits? What contact methods are available, and what information should employees prepare to facilitate effective communication regarding their pension inquiries? These questions will help employees navigate the complexities of the Windstream Pension Plan and ensure they are well-informed as they approach retirement.

Reaching the Benefits Committee: Windstream employees can contact the Benefits Committee or Plan Administrator at Windstream Services, LLC in Little Rock, Arkansas, or via the Merrill Service Center at 1-800-228-4015. Employees should have relevant information, such as personal and employment details, ready to facilitate efficient communication(Windstream_Pension_Plan…).