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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Tax deferred portfolio is also known as qualified accounts, have

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Speaker 2: become one of the most popular ways to invest. There

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Speaker 2: are about one hundred million households nearly seventy five percent

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Speaker 2: of every household in America with some sort of a

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Speaker 2: formal tax advantage. Retirement savings total defined contributions are nearly

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Speaker 2: fourteen trillion dollars. The latest edition in your Tax Deferred

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Speaker 2: Portfolio Choices is the Mega Backdoor Row. To help us

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Speaker 2: unpack all of this and what it means for your

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Speaker 2: retirement savings, let's bring in Dan L.

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Speaker 3: Rosa.

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Speaker 2: He's an expert in qualified retirement accounts and works with

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Speaker 2: clients all over the country. In full disclosure, Dan leads

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Speaker 2: the corporate retirement plans at my Firmer Helts Wealth Management

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Speaker 2: and is one of my partners. So let's start with

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Speaker 2: the basics. Most of our listeners are certainly familiar with

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Speaker 2: four oh one ks, and they're probably familiar with variations

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Speaker 2: such as a ROTH four oh one K or a

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Speaker 2: ROTH IRA. What is a Mega backdoor WROTH?

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Speaker 4: So a regular four one K allows you to contribute

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Speaker 4: up to twenty four and a half thousand dollars into it.

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Speaker 3: Right.

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Speaker 4: The mega backdoor of ROTH feature just allows you to

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Speaker 4: contribute above and beyond that twenty four and a half

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Speaker 4: thousand dollars up to potentially seventy two thousand dollars. So

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Speaker 4: it uses the same type of strategy that you have

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Speaker 4: in your regular backdoor ROTH IRA. Right, that's just a

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Speaker 4: way for high earners to get money into a ROTH account.

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Speaker 4: They're going to make a non inductible contribution to a

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Speaker 4: traditional IRA and then convert that to a ROTH IRA.

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Speaker 4: It works, it's great, but the dollar amount is pretty small, right,

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Speaker 4: it's seven five hundred dollars. The Mega backdoor ROTH uses

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Speaker 4: the same strategy, but inside of your four one K plan,

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Speaker 4: where the contribution limits are significantly higher.

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Speaker 2: So mega backdoor four oh one k ROTH sounds kind

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Speaker 2: of complicated, but it really seems like that's a huge

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Speaker 2: increase in your after tax contributions that theoretically grow tax

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Speaker 2: free and are withdrawn tax free. Is that right?

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Speaker 3: That's right.

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Speaker 4: It's it's a cheap when it works and your plan

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Speaker 4: allows it. It's a cheat code, right, There's nothing else

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Speaker 4: out there that's going to allow you to get that

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Speaker 4: much money into a qualified and that means that much

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Speaker 4: rock dollars into a qualified retirement account.

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Speaker 2: So cheat codes and back doors sounds a little shady.

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Speaker 2: Is this legit with the irs? Have they blessed this? Yeah?

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Speaker 4: Yeah, it's just the backdoor part that sounds kind of sketchy.

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Speaker 2: It is.

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Speaker 4: It is not a gray area, it is not a loophole.

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Speaker 4: It's completely legit. The rules are actually very much clear.

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Speaker 4: The real challenge is just whether or not your plan

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Speaker 4: allows you to use it.

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Speaker 2: So let's go through that. If the I R S

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Speaker 2: says it's kosher, I would imagine your employer or the

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Speaker 2: benefits provider, maybe even the custodian who who has to

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Speaker 2: sign off on it? Is Is it any of the

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Speaker 2: above or all the above whose approval is required?

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Speaker 3: Yeah, it's There's really nothing to do with the custodian

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Speaker 3: with this.

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Speaker 4: It's more of a plan level decision that's going to

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Speaker 4: be made by the employer, right. They're the ones that

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Speaker 4: are going to control the plan design and would ultimately

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Speaker 4: make the decision to offer the after tax contributions in

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Speaker 4: plan Wroth conversion features that make up this megabactoor Wroth.

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Speaker 4: The formul k provider is obviously involved and they need

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Speaker 4: to be able to administer this, but that's generally.

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Speaker 3: Not a problem.

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Speaker 2: Huh. So typically twenty four and a half twenty four

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Speaker 2: point five is a regular four oh one K. I'm

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Speaker 2: assuming catch ups and things like that are separate. So

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Speaker 2: if you could go to seventy two thousand in this

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Speaker 2: and it's after tax, why would the employer object? This

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Speaker 2: sounds like a great deal for anyone who wants to

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Speaker 2: throw more money into their four o one K.

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Speaker 4: Yeah, and this feature has gotten a lot more popular

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Speaker 4: in recent years, but the reality is the most likely

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Speaker 4: answerest to why.

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Speaker 3: More plans don't do it.

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Speaker 4: It just doesn't work for every plan after tax contributions

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Speaker 4: and the inplan wealth conversions do add some complexity to

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Speaker 4: the plan design that most importantly, they trigger additional compliance testing,

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Speaker 4: and that extra compliance test thing it failed can prevent

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Speaker 4: the whole strategy from working all together.

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Speaker 2: So I know our plan in our shop offers this

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Speaker 2: in house, and I've been taking advantage of it personally.

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Speaker 2: So I'm thinking about other service companies, lawyers, accountants, advisors, architects,

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Speaker 2: anybody that's you know, a white collar office with reasonable salaries.

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Speaker 2: It would seem that this should be something that all

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Speaker 2: those people should take advantage of Why don't all of

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Speaker 2: these sort of firms take advantage of it? It sounds like, hey,

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Speaker 2: seventy two thousand triple what you normally allow. That's seventy

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Speaker 2: two thousand above what your traditional for one K is giving.

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Speaker 2: Why wouldn't everybody jump on this?

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Speaker 4: Yeah, it was seventy two thousand and actually the total

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Speaker 4: that's you're all in that each individual can get into

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Speaker 4: each plan. But why don't more plans or companies use

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Speaker 4: this feature? Again, it just doesn't always work. So, without

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Speaker 4: getting too deep into the weeds on the compliance tessing side,

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Speaker 4: if the only individuals that are interested in using this

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Speaker 4: feature and contributing making these after tax contributions are the

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Speaker 4: owners and highest wagoarners, it's not going to work.

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Speaker 3: It's as simple as that.

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Speaker 4: So the company either has to be big enough or

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Speaker 4: have enough wayjarners where it's just not the top twenty

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Speaker 4: percent or so using it in order for.

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Speaker 3: It to work.

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Speaker 2: So what does it typically look like in a firm

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Speaker 2: that does this? What sort of buy in do you

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Speaker 2: need from management as well as the rest of the

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Speaker 2: staff or partnership.

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Speaker 4: Yeah, I mean listen as far as buying from the staff.

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Speaker 4: If you have a lot of employees that are contributing

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Speaker 4: and maxing out, right, If you have a lot of

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Speaker 4: people that are maxing their contributions and would do more

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Speaker 4: if they could, that's good sign, right, It's worth looking

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Speaker 4: into in that situation. But you also have to have

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Speaker 4: enough highly compensated individuals.

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Speaker 3: Right if you just have If you have.

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Speaker 4: Thirty people and eight of them are the big wag journers,

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Speaker 4: it's just again, it's not going to work.

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Speaker 3: It's going to be top heavy.

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Speaker 4: So if you have enough highly compensated individuals that are

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Speaker 4: interested in using this feature, there's a good shot at

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Speaker 4: all work.

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Speaker 2: So I immediately thought of professional services companies, financial advisors, attorneys, accountants, bankers, doctors, etc.

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Speaker 2: But you know, what sort of industries do you see

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Speaker 2: use this? What sort of businesses? Is this really well

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Speaker 2: suited for.

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Speaker 3: All the professionals that you just listed?

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Speaker 4: Tech companies, I mean, i'd say all just about all

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Speaker 4: of the big tech companies have this feature available. Again,

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Speaker 4: and I think any industry or any company where a

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Speaker 4: large percentage of the population would be considered highway journers,

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Speaker 4: meaning say over one hundred and fifty hundred sixty thousand

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Speaker 4: dollars a year and that are interested in making these

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Speaker 4: significant contributions.

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Speaker 3: It could work.

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Speaker 2: So let's assume you have a traditional four oh one

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Speaker 2: K and everybody is maxing out their twenty four point

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Speaker 2: five plus whatever catch up over fifties out there, and

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Speaker 2: they want to be able to save more money. What

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Speaker 2: is the process like converting that to a megabackdoor roth?

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Speaker 2: Walk us through that process.

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Speaker 4: Yeah, Ultimately it's going to have to come from the employer, right,

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Speaker 4: so whoever at the company is in charge of running

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Speaker 4: and administering the four to one K will need to

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Speaker 4: be involved in that decision. You know, if you're an

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Speaker 4: influential employee, of course you can try and influence and

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Speaker 4: push on that decision. But ultimately the plan sponsor the

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Speaker 4: employer will work with the four to one K provider

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Speaker 4: to update the plan documents add a couple of features.

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Speaker 4: For the megabackdoor ROTH to work. A plan has to

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Speaker 4: allow two things. The first is the ability to make

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Speaker 4: after tax contributions and the second is a way to

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Speaker 4: move those after tax dollars into.

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Speaker 3: A ROTH account.

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Speaker 4: Moving the after tax dollars into WRATH can happen one

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Speaker 4: of two ways first you have an implan WROTH conversion

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Speaker 4: where the after tax dollars are converted to ROTH and

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Speaker 4: stay in the four to one K plan. And the

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Speaker 4: second is an in service distribution where the after tax

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Speaker 4: dollars are rolled into an outside ROTH IRA mplan. ROTH

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Speaker 4: conversion is probably more common. It's just simpler to execute,

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Speaker 4: and it keeps all the money inside the plan.

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Speaker 2: Huh, I mean this is really attractive. I'm assuming someone

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Speaker 2: reaches out to HR or one of the managing directors

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Speaker 2: or partners or whatever the title is and says, hey,

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Speaker 2: this is a great opportunity. Want don't we do this?

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Speaker 2: Is there like an extra cost? Why would there be

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Speaker 2: any reluctance to do this assuming it's the sort of

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Speaker 2: mix of high wage employees.

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Speaker 4: Yeah, there is no additional costs. You could say, there's

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Speaker 4: a little bit of an additional headache. Right again, you're

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Speaker 4: adding more complexity, another layer of compliance testing.

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Speaker 3: So whoever you know is.

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Speaker 4: In charge of administering the four O one K company? Yeah,

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Speaker 4: maybe it amounts to a little more work, but when

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Speaker 4: it works, it works really well, and these significant benefits

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Speaker 4: far outweigh you know, the minor administrative additional administrative burden.

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Speaker 2: So we're talking about companies with partners and hr et cetera.

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Speaker 2: What about either a solo practitioner or a ten ninety

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Speaker 2: nine contractor. Can you do this sort of megaback door

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Speaker 2: roth if you're self employed?

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Speaker 4: Yes, absolutely, megabacdoor roth works perfectly for solo or owner

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Speaker 4: only four one K plans. There are no compliance tests

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Speaker 4: and headaches or administrative burdens when the plant only covers owners.

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Speaker 3: So we we're.

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Speaker 4: Huge fans of the megabacdoor wroth in solo formal case.

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Speaker 2: So let's talk about timing. How does this work? How

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Speaker 2: much are people converting? You know, what does this look

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Speaker 2: like in terms of best practices, either daily or each

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Speaker 2: pay period or quartterally. How often does this occur?

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Speaker 4: It really depends on the plan or on the plan provider.

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Speaker 3: Some plans only allow.

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Speaker 4: A certain number of conversions or distributions each year, which

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Speaker 4: is obviously not ideal and it really kind of pushes

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Speaker 4: the burden onto the participant to figure out when and

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Speaker 4: how to do that. Others have daily automatic roth conversions,

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Speaker 4: which is just awesome.

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Speaker 3: I've done it both ways, right, I've had the once a.

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Speaker 4: Year manual paper form after tax conversions and we now

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Speaker 4: have the daily automatic.

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Speaker 3: Wroth conversions with Fidelity, and it's a game changer. It's great.

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Speaker 4: As an employee, you don't have too much control over that.

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Speaker 4: It really depends on the provider. But whatever the case,

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Speaker 4: I certainly recommend reaching out to your four to one

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Speaker 4: key provider the first time you do this, the first

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Speaker 4: time you convert, and making sure you get it right,

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Speaker 4: do it.

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Speaker 3: The right way.

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Speaker 2: So you and I have talked about this in the past,

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Speaker 2: and you discussed automatic wroth sweeps. Is that something that

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Speaker 2: again gets set up by the provider or the employer

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Speaker 2: or the employee. How do you make sure that each

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Speaker 2: payroll period or in the event of any distribution or

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Speaker 2: yield or dividend, how do you make sure that stays

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Speaker 2: on the wroth side.

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Speaker 3: Yeah, it's a great point.

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Speaker 4: So that daily automatic roth sweep or automatic roth conversion

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Speaker 4: is awesome, but only some record keepers, only some providers

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Speaker 4: offer it.

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Speaker 3: Right.

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Speaker 4: So the answer, as it usually is with these types

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Speaker 4: of plans, as it depends right. Every plan is different,

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Speaker 4: every provider is different. If your plan does offer it,

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Speaker 4: or if you're not sure, reach out to the four

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Speaker 4: one K provider. If your plan does offer it, the

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Speaker 4: employee generally has to activate this daily automatic growth conversion feature.

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Speaker 2: All right, so I know my four oh one K

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Speaker 2: is a Fidelity all of these daily sweeps and other

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Speaker 2: things that you know, from my perspective, it was set

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Speaker 2: and forget, I don't have to pay much attention to it.

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Speaker 2: What about some of the other big four oh one

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Speaker 2: K provider Schwab, Vanguard, Is it possible to do it

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Speaker 2: with those? And do they allow for these daily sweeps

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Speaker 2: like what's the landscape look like out there?

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Speaker 3: Yeah?

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Speaker 4: As this feature has gotten more and more popular in

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Speaker 4: recent years, which it certainly has, more providers are getting

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Speaker 4: better at it.

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Speaker 3: Right five years ago, I.

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Speaker 4: Don't know if anyone outside of Fidelity did it now

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Speaker 4: if there, certainly, if your plan is big enough, you

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Speaker 4: can pretty much do whatever you want for it. I

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Speaker 4: think if Fidelity just happened to be the first one

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Speaker 4: that was really good at administering it.

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Speaker 3: But other providers are catching up quickly.

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Speaker 2: Last question. People hear this described as tax free growth forever,

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Speaker 2: and obviously that gets people excited, But what are the risks?

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Speaker 2: What scenarios? Does this not make any sense? Where are

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Speaker 2: you just better off investing in a taxable account?

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Speaker 4: Yeah, I think the excitement is warranted. I'm a huge

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Speaker 4: fan of the megabactoor roth feature. If your plan offers

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Speaker 4: it and you can afford the extra contributions, my answer

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Speaker 4: is usually do it.

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Speaker 3: Just keep in mind a couple of things.

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Speaker 4: First, if you use that in plan Wroth conversion, the

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Speaker 4: money stays in the plan and then follows the Wroth

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Speaker 4: four to H one k rules all right, So that

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Speaker 4: means you generally can't access that money until age fifty

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Speaker 4: nine and a half or distributable event. So I think

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Speaker 4: the biggest thing answer your question when does a taxable

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Speaker 4: account make more sense if present day liquidity is important?

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Speaker 2: What about out megabeck door roths. Is there the same

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Speaker 2: required minimum withdrawal requirements?

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Speaker 4: Actually, I think effective last year, the Secure two point

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Speaker 4: zero removed the R and D requirement from Wroth four

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Speaker 4: one case, so there.

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Speaker 3: Are no rm D requirements for a row for one case.

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Speaker 2: Really interesting. So if you're working in a firm, or

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Speaker 2: if you're a solo practitioner and you're making a decent

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Speaker 2: amount of money but you want to save more for retirement,

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Speaker 2: the megabackdoor rowth allows you to use after tax dollars

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Speaker 2: up to seventy two thousand to put into this account

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Speaker 2: that will not only grow tax free, but you can

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Speaker 2: withdraw a tax free whenever you want after age fifty

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Speaker 2: nine and a half, with no minimum requirements when you

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Speaker 2: turn seventy three. It sounds like a great opportunity, and

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Speaker 2: a lot of people just are unaware of it and

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Speaker 2: are not taking advantage of it. You should look into

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Speaker 2: this if you're in those circumstances and you have an

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Speaker 2: employer who will work with you to create a better

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Speaker 2: corporate retirement plan. I'm Barry Dults you're listening to at

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Speaker 2: the Money