The enormous entryway Roth IRA is a strategy Verizon'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 Verizon 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 Verizon 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. Verizon'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 Verizon 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 Verizon. 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 Verizon 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 Verizon-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 Verizon, 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 Verizon 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 Verizon 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 Verizon 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 Verizon 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 Verizon 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 Verizon employees make withdrawals?
Verizon employees are required to accept the payments on an annual basis.
Can Verizon 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 Verizon 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 Verizon 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 Verizon 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 Verizon 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, Verizon 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 Verizon Pension Plan facilitate retirement income for long-term employees, and what specific benefits can employees expect when enrolling in the retirement program provided by Verizon? What unique features does the Verizon Pension Plan offer compared to other retirement plans an employee might have encountered, and how can employees maximize the benefits of these features throughout their career at Verizon?
Verizon Pension Plan Benefits: Verizon's Pension Plan offers substantial benefits aimed at facilitating a secure retirement for long-term employees. Upon enrolling in the retirement program, employees can expect defined benefits that are based on their salary and years of service, ensuring a predictable and stable income after retirement. Unique to Verizon, compared to some other plans, may include options for early retirement under certain conditions and a choice between annuity payments or a lump-sum distribution upon retirement. Employees can maximize these features by planning for long-term service and considering their retirement income needs early in their careers.
In what ways can employees at Verizon strategize their rollover decisions when transitioning from the Verizon Pension Plan to other retirement savings plans upon leaving the company? What factors should be considered by Verizon employees to ensure they are making informed choices regarding rolling over funds to a traditional IRA or another qualified employer plan?
Rollover Strategies: When transitioning from the Verizon Pension Plan to other retirement savings options upon leaving the company, employees should strategize their rollover decisions carefully. Factors to consider include the tax implications, the investment options available in the rollover destination, and the timing of the transfer to avoid penalties. Verizon employees should evaluate the benefits of rolling over to a traditional IRA or another employer's plan, considering their future financial needs and retirement goals.
What are the implications of the recent IRS limits for 2024 concerning contributions to retirement plans for Verizon employees, and how does Verizon align its offerings with these federal regulations? Additionally, how can Verizon employees best take advantage of these limits to enhance their retirement savings while adhering to tax regulations?
IRS Contribution Limits: The implications of IRS limits for 2024 are critical for Verizon employees as these limits dictate how much can be contributed tax-deferred into retirement plans. Verizon aligns its offerings with these federal regulations by adjusting contribution limits in their plans accordingly. Employees are encouraged to maximize their contributions to take full advantage of tax-deferred growth, especially when IRS limits increase, thereby enhancing their retirement savings while adhering to tax regulations.
How does the special tax treatment for lump sum distributions from the Verizon Pension Plan affect employees who receive their benefits early or have specific circumstances, such as being born before 1936? What options do these employees have to manage their tax burden effectively, and how can they best navigate these complicated rules while planning for their retirement?
Tax Treatment of Lump Sum Distributions: The special tax treatment for lump sum distributions from the Verizon Pension Plan can significantly affect employees who opt to receive their benefits early or under specific circumstances like being born before 1936. These employees have options to manage their tax burden effectively by opting for ten-year averaging or capital gain treatment on eligible distributions, allowing for a potentially lower tax rate on their pension benefits.
For surviving spouses and alternate payees of Verizon employees, what are the specific benefits available under the Verizon Pension Plan? How do these benefits compare to those available to employees, and what steps must surviving spouses or alternate payees take to ensure they receive their entitled benefits without delays or complications?
Benefits for Surviving Spouses and Alternate Payees: For surviving spouses and alternate payees, the Verizon Pension Plan offers benefits similar to those available to employees, such as annuity payments or lump-sum options. These beneficiaries must take certain steps to ensure they receive their benefits without delays, such as providing necessary documentation and adhering to plan rules. The plan details and processes for claiming benefits should be clearly understood to avoid complications.
How can Verizon employees utilize the resources available through the Verizon Benefits Center to better understand and manage their retirement benefits? What specific tools and services does the Benefits Center provide, and how can these resources assist employees in making informed decisions regarding their pension plan options?
Utilizing Resources at the Verizon Benefits Center: Verizon employees can utilize various tools and services provided by the Verizon Benefits Center to manage and understand their retirement benefits. The Benefits Center offers personalized consultations, detailed plan documentation, and tools for estimating pension benefits and planning retirement income, assisting employees in making informed decisions about their pension plan options.
What challenges might Verizon employees face regarding eligibility and tax withholding when receiving their pension payments, and how can they mitigate these issues? It's crucial for employees to understand the mechanics of eligibility regarding rollovers and payment processing; what key pieces of information should they be aware of to avoid unexpected taxes?
Challenges in Eligibility and Tax Withholding: Verizon employees might face challenges regarding eligibility and tax withholding when receiving pension payments. Understanding the plan's criteria for eligibility, the implications of rollovers, and the impact of mandatory withholding on distributions is crucial. Employees can mitigate these issues by consulting with the Verizon Benefits Center or a tax advisor to ensure compliance and avoid unexpected taxes.
What is the process for Verizon employees wishing to initiate a direct rollover from the Verizon Pension Plan, and what documentation will they need to prepare? Can employees receive assistance from the Verizon Benefits Center during this process, and how does using a direct rollover benefit them compared to other forms of payment?
Direct Rollover Process: The process for initiating a direct rollover involves deciding the destination of the rollover (traditional IRA or another employer plan), completing necessary documentation, and potentially seeking assistance from the Verizon Benefits Center. A direct rollover helps in avoiding immediate taxes and maintaining the tax-deferred status of retirement savings.
In terms of retirement preparedness, how does the pension plan at Verizon accommodate employees’ needs for financial security in their senior years? What additional education or resources does Verizon provide to assure that employees fully understand their retirement options and the importance of planning ahead?
Retirement Preparedness: Verizon's pension plan is designed to accommodate the financial security needs of employees in their senior years. In addition to the pension benefits, Verizon provides educational resources and planning tools to ensure employees understand their retirement options and the importance of early and consistent retirement planning.
How can employees reach out to the Verizon Benefits Center for further information about the pension plan and other retirement benefits? What specific contact methods are available to employees, and how can these interactions enhance their understanding and management of retirement benefits provided by Verizon?
Contacting the Verizon Benefits Center: Verizon employees seeking more information about their pension plan and other retirement benefits can reach out to the Verizon Benefits Center through various contact methods such as phone, email, or online portals. These interactions are crucial for enhancing understanding and effective management of retirement benefits, ensuring employees make the most of the benefits available to them.
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