Broker Check

2 Little-known Ways To Maximize Your Retirement Plan

| January 12, 2017

Are you and your financial advisor effectively maxing out your Retirement Plan?

Every year, we have clients ask if there is anything else they can do to maximize what is going into their Retirement Plans.  Here are two ideas that you may not have heard about:

401k Contributions times 2

Did you know you can max out TWO retirement plans …possibly totaling $112,000 in contributions?

It’s true! There is a unique scenario that allows for the maximization of more than one qualified plan. Here’s how it works.  The Annual Contributions Limit for a qualified plan in 2016 is $53,000. (Plus an additional $6,000 of deferral if your client is age 50 or older.)  Once you hit that $53,000 limit, you cannot have any additional monies added to your plan. UNLESS…you are a participant in TWO plans. 

If you are a participant in two plans then you can reach the limit on both plans! So, that means that you could have two plans that max out at $53,000 for a total of $106,000 (or $112,000 if you are 50 or older) in retirement plan contributions.

The rules are as follows.  The portion you defer into a plan belongs to that person across any and all plans.  For example, if you defer $18,000 into your 401k, you cannot make any more deferrals into any type of defined contribution plan.  The part you defer is on a per person basis, so $18,000 cumulative total across all plans. The portion the employer contributes on your behalf is on a per plan basis, not per person basis. (For more information click here)    

Now let’s say you work for ABC Company and are 52 years old making $200,000. You always max out what you can defer in that plan.  You also have an at home business which is doing really well and expected to make $300,000 profit from that business. Assuming you have a 401k plan with your full-time company and another 401k plan with your at home business, what is the maximum amount you and your employer can contribute to your 401k plans?  ABC company, would be $18,000 deferral plus $6,000 catch up = $24,000 of employee deferral, plus an additional $35,000 of employer profit sharing = $59,000.  Also, you have a 401k for your home business, in which the employer makes a profit sharing contribution of $53,000.  So a total of $112,000 could be contributed to your 401k for 2016. 

Mega Backdoor Roth IRA

Do you know how to use a Mega Backdoor Roth to maximize your clients’ contributions?

What is a Mega Backdoor Roth? A Mega Backdoor Roth allows a participant of a 401k plan to make after-tax contributions to their 401k that they can essentially convert to a Roth without paying taxes on the conversion.  It works the same way as a backdoor Roth IRA, but when you use your company’s employer plan it allows for a much greater Roth conversion.

Essentially you are allowed to make a deferral contribution of $18,000 into a Roth, plus $6,000 for catch up if age 50 or older. You can also make an after-tax contribution in your employer’s 401k plan, up to the annual contributions limit, which is $53,000 for 2016.  This can be incredibly advantageous for plans that allow in-service withdrawals or in-plan conversions. 

For example, let’s say you are 50 years old and have decided to max out your Roth deferral portion of your 401k, $18,000 of deferral plus an additional $6,000 catch up. Your employer gives you a profit sharing contribution of $5,000 dollars.  For the year 2016, you could make an additional after-tax contribution of $30,000 into your 401k plan.  If your plan has in-service withdrawals you could then immediately convert the $30,000 of after-tax contributions to a Roth IRA. (For more information click here)

 If your plan doesn’t allow for in-service withdrawals, or not old enough to get access to your 401k monies then it will be up to you and the record keeper to make sure that your contributions are being tracked correctly.  Keep in mind, any earnings on after-tax contributions are considered taxable upon withdrawal or conversion.  Also, more plans are now allowing for in-plan conversion, which means you can convert your after-tax contributions directly inside of your plan.

*This is a very complex strategy so please contact us for more details on implementation pros and cons. 

Cody Reading is a financial advisor at MSMF Wealth Management. He specializes in retirement planning strategies and believes that the best part of his job is helping clients reach their financial objectives. In his spare time, Cody enjoys hiking, cooking, traveling, spending time with his family, and attending Cardinals and Blues games. 

The tax scenarios above are provided for illustrative purposes only. Always consult our tax professionals to discuss your particular situation and how we can help.