Future of 401ks

[Pucky Freak]

This is more of a tax policy discussion; a discussion that was going on pre-1776, and has continued. I remember when I first started as a tax accountant and there was the big fight over taxability of SS. Since it had already been taxed, but the earnings (if you want to call it that) weren't, a compromise was reached on "means testing" for the taxability rather than means testing on the ability to receive it.

In the debates over tax policy since I started in 1989, there have been common outcomes. First, the well-connected and politically involved folks get the better end of the deal. Second, this country values capital more than labor, with both being necessary for a productive economy.

That second point, capital v. labor, is at the foundational issue in many of our political debates. It is expressed in many ways. I'm always interested to hear the reasons for valuing labor over capital, or valuing capital over labor.

The tax code and associated regulations are a great way to express the difference in how we value capital and how we value labor.

The overall tax burden from returns derived by labor is now way higher than it is on returns derived by capital. That big swing has happened in my adult life. It is an expression of our collective values as a country, whether we want to admit it or not.

The change in the 1980-2000 from Defined Benefit Plans (pensions) to Defined Contribution Plans (401K/Profit Sharing Plans), is another way we express these values of capital v. labor. DB plans were largely accepted as an employer (often pooled capital) responsibility, and thus a liability. Pooled capital used state liability laws to shed that DB liability, such that Congress had to establish the Pension Benefit Guaranty Corporation to bail out the groups of pooled capital that used liability protection laws to leave pooled labor holding the bag. Thus the migration toward DC plans that put the retirement burden on pooled labor, most of whom don't have enough disposable cash/income to accumulate much in the way of retirement benefits.

And now, with most pooled capital organizations removed from the DB liability owed to pooled labor, the next step, which is the focus of this thread, is how do we tax that DC benefit even more now that the DC balances accumulated in 401K plans are mostly from the labor side of the equation. Is that another expression of our value of capital v. labor?

Anytime Congress gets in these discussions, they hope Americans get bogged down in the minutia and that we don't see it as an debate of how we value capital versus how we value labor. These debates are just that.

Sorry for the side bar. Carry on ........

Would someone explain what things might look like if our country valued labor more? And explain it to me like I’m a 3rd grader?

 

[VikingsGuy]

Would someone explain what things might look like if our country valued labor more? And explain it to me like I’m a 3rd grader?

To one specific concern I raised earlier, we would tax earned income at the same rate and in the same manner as dividends, capital gains, "carried interest", "non-recourse loans", loans against unrealized gains, etc. We would also find a way (not easy to do without unintended consequences) to capture the seemingly never realized equity gains - maybe we need something like RMD from 401k practice - and to that point, if you have stock in a private account you can defer gains forever, but if you have it in a 401K you will face RMDs - and guess who has the majority of their savings in directly owned stock vs. who has it in held in 401ks.

 

[AvidIndoorsman]

Sweet - getting free tax advice from the big guy

A nice reprieve from what is the best elk caliber

 

[SAJ-99]

Say an employee maxes out with $23k how can the employer max out their match at 60k?

You didn't ask me, but I'm curious for the opinions. I'm not even sure I understand the question, but the amount is $66k and that is the total for all pretax contributions to all accounts for a single year. It sounds like you want to find out who in your company you need naked pictures of to get that contribution maxed out?

Would someone explain what things might look like if our country valued labor more? And explain it to me like I’m a 3rd grader?

Good question. I doubt if it would look much different, but maybe we wouldn't be in the financial mess we are in. Here is a table showing what Big Fin was describing. We certainly value labor, but only to tax it. Maybe the biggest difference would be the working individual wouldn't feel like it was impossible to keep their head above water and we would still have a middle class.

Amount of Revenue by Source

Receipt composition by type of tax from 1934 to 2028.

www.taxpolicycenter.org

 

[npaden]

@Big Fin or @npaden

We have a safe harbor match at work for our 401k, and I have brought up changes we could make to maximize contributions and tax savings for the company.

What’s the best way to accomplish this?

Say an employee maxes out with $23k how can the employer max out their match at 60k?

It’s pretty straightforward to do, but not many employers are matching that much.

We used to do a safe harbor straight contribution of 4% whether the employee contributed or not. We switched to a 5% match because we had around 15% of the employees weren’t contributing a dime. I figured that it was worth the extra % to help spur people into contributing at least 5%. We still have a couple that aren’t contributing. And this is a CPA firm where you would think folks would understand saving for retirement and how the matching principle works.

 

[npaden]

There is a thing called a Mega Back Door 401k Roth where you can really pile in some money if that’s what you are looking for.

I do a back door Roth every year outside my 401k plan but the mega back door is inside your 401k plan. You can pile in a bunch that way. I’ve looked at it a little but I think I would be the only one using it I thought. It takes a few plan amendments to allow in service distributions and a few things I was afraid might get abused by people not doing the mega back door thing.

Mega Backdoor Roths: How They Work - NerdWallet

If you're a high-earner who can't contribute to a Roth IRA, a mega backdoor Roth — particularly if your 401(k) plan allows it — might be a solution.

www.nerdwallet.com

Mega backdoor Roth 2024​

The mega backdoor Roth allows you to save a maximum of $69,000 in your 401(k) in 2024. How does this add up? The regular 401(k) contribution for 2024 is $23,000 ($30,500 for those 50 and older). You can put an additional $46,000 of after-tax dollars into your 401(k) account, assuming you don't get an employer match.

The cap is $69K so if your employer did match your $23k then you could only do and extra $13K. I think you can still do the back door Roth IRA too.

 

[AvidIndoorsman]

You didn't ask me, but I'm curious for the opinions. I'm not even sure I understand the question, but the amount is $66k and that is the total for all pretax contributions to all accounts for a single year. It sounds like you want to find out who in your company you need naked pictures of to get that contribution maxed out?

We have a 6% so you are going to fall well short of 66k, seems like per @npaden post that you can contribute the difference after tax. I thought only the employer could make up that difference.

Seems like per the article you could have a bonus paid as an after tax contribution.

That’s the info I was seeking.

A rephrase of my original question: If my CEO said “max compensation is capped at salary + 6%, here is the number to our benefits company if there is a way for some folks to get more of their total comp into our 401k but still allow others to choose little or no contribution then go for it, then what would I even ask for them to do.

 

[npaden]

We have a 6% so you are going to fall well short of 66k, seems like per @npaden post that you can contribute the difference after tax. I thought only the employer could make up that difference.

Seems like per the article you could have a bonus paid as an after tax contribution.

That’s the info I was seeking.

You can only contribute over the max if your plan allows after tax contributions. Most don’t allow that. Then the plan has to allow in service distributions so you can withdraw it and put it in a Roth IRA. Most plans don’t allow that. Generally plans get amended once a year if needed to comply with new laws and regulations and there is a notification period involved so you would need the plan to be amended for those 2 things before it will work.

I probably should get off my but and get our plan amended as I could put in right around another $20K with the mega back door deal.

 

[SAJ-99]

We have a 6% so you are going to fall well short of 66k, seems like per @npaden post that you can contribute the difference after tax. I thought only the employer could make up that difference.

Seems like per the article you could have a bonus paid as an after tax contribution.

That’s the info I was seeking.

A rephrase of my original question: If my CEO said “max compensation is capped at salary + 6%, here is the number to our benefits company if there is a way for some folks to get more of their total comp into our 401k but still allow others to choose little or no contribution then go for it, then what would I even ask for them to do.

The max can be applied to different accounts. For example, a person can max out the 401k with an employer (W2 employee) and have a side contracting job (1099) that allows them to contribute to a Sep IRA. There are limitations on that of 25% of net taxable income, but the total of all is limited to 66k. At least that is what I used for the taxes this year. Even after jumping through all the hoops I doubt the total was anywhere close to the limit. Of course I don’t know until I see the employer match. It’s always fun to try to do taxes without knowing actual numbers. Ie, Accountant Full Employment Act.

 

[Devil Diver Down]

The goal is to make you work until you die.

Or maybe a bit longer than that, if they can get their math right.

 

[npaden]

The max can be applied to different accounts. For example, a person can max out the 401k with an employer (W2 employee) and have a side contracting job (1099) that allows them to contribute to a Sep IRA. There are limitations on that of 25% of net taxable income, but the total of all is limited to 66k. At least that is what I used for the taxes this year. Even after jumping through all the hoops I doubt the total was anywhere close to the limit. Of course I don’t know until I see the employer match. It’s always fun to try to do taxes without knowing actual numbers. Ie, Accountant Full Employment Act.

I'm pretty sure that you can do the Mega Backdoor Roth in your employer 401k plan to get you to the cap AND do the regular back door Roth IRA. (Not 100% sure more like 99%).

For 2024 that would allow you to do the $23,000 maximum pre-tax contribution into your 401k then whatever your employer matches goes in (for simplicity lets say you are maxed on compensation so you are at the IRS limit of $345,000. A 6% match on that would be $20,700. So if your plan allowed it you could put in an additional $25,300 to get you to the $69,000 maximum.

THEN you could go do a backdoor Roth IRA on your own for an additional $7,000.

That would get you $43,700 of tax deferred contributions going into your 401k and $32,300 in already taxed contributions that are in a Roth where the earnings are forever tax deferred. Total saved for 2024 for someone under 50 would be $76,000. If you are over 50 you get to add the catch up to the total and it is $84,500.

If you are saving that much for retirement I would think you are going to be in pretty good shape.

 

[SAJ-99]

I'm pretty sure that you can do the Mega Backdoor Roth in your employer 401k plan to get you to the cap AND do the regular back door Roth IRA. (Not 100% sure more like 99%).

For 2024 that would allow you to do the $23,000 maximum pre-tax contribution into your 401k then whatever your employer matches goes in (for simplicity lets say you are maxed on compensation so you are at the IRS limit of $345,000. A 6% match on that would be $20,700. So if your plan allowed it you could put in an additional $25,300 to get you to the $69,000 maximum.

THEN you could go do a backdoor Roth IRA on your own for an additional $7,000.

That would get you $43,700 of tax deferred contributions going into your 401k and $32,300 in already taxed contributions that are in a Roth where the earnings are forever tax deferred. Total saved for 2024 for someone under 50 would be $76,000. If you are over 50 you get to add the catch up to the total and it is $84,500.

If you are saving that much for retirement I would think you are going to be in pretty good shape.

Wow. That is way beyond my knowledge of retirement accounts, and I need a better accountant. Can I only do the Mega Backdoor whachamathingy conversion once?

 

[npaden]

Wow. That is way beyond my knowledge of retirement accounts, and I need a better accountant. Can I only do the Mega Backdoor whachamathingy conversion once?

No. If your plan is set up for it you can do it every year. I'm actually reaching back out to our 401k provider again to go ahead and get our plan set up for this.

I'm 55 so I think I could throw an extra $25k or $30k in the next 5 or 6 years and that would be nice to have a larger piece of my 401k in Roth so I can use it to work the tax brackets to my advantage as much as possible when I'm withdrawing.

The trick is that you do the after tax contribution into whatever vehicle you are using and then immediately the next day you move it into the Roth bucket. You get taxed on any earnings while it is in the traditional bucket before you get it converted. When I do my backdoor Roth contributions I put it into a traditional IRA and then the next day convert my traditional IRA into my Roth IRA. The same principal applies with the Mega backdoor in your 401k.

 

[npaden]

To circle back around to the original topic of the thread I think the Mega Backdoor loophole helps show how the system does have some issues. Not a lot of people are setup to be slamming in $76,000+ a year into tax advantaged assets but it can be done.

The regular backdoor Roth has always seemed crazy to me as well. I make too much money to contribute to a Roth IRA. So instead I contribute to a Traditional IRA and then the next day convert it to a Roth IRA. Seems like the income limitation isn't worth the paper it is written on.

The Mega Backdoor loophole makes that seem like pocket change though.

 

[ashersdad]

The max can be applied to different accounts. For example, a person can max out the 401k with an employer (W2 employee) and have a side contracting job (1099) that allows them to contribute to a Sep IRA. There are limitations on that of 25% of net taxable income, but the total of all is limited to 66k. At least that is what I used for the taxes this year. Even after jumping through all the hoops I doubt the total was anywhere close to the limit. Of course I don’t know until I see the employer match. It’s always fun to try to do taxes without knowing actual numbers. Ie, Accountant Full Employment Act.

@npaden correct me if I'm wrong, it is my understanding you can max out both the 401k and SEP as long as you don't have ownership in the company that you get the W2 from. 69k for each in 2024.

 

[LopeHunter]

Or capital gains at the same rate as income...

Or tax carried interest as occurs rather than allow deferral.

 

[Maverick1]

1. Would you go to a "major media outlet" forum for hunting advice? (CNN, NBC, USA Today, CBS, etc.)

2. Would you go hunting forum for financial advice?

 

[buckbull]

To circle back around to the original topic of the thread I think the Mega Backdoor loophole helps show how the system does have some issues. Not a lot of people are setup to be slamming in $76,000+ a year into tax advantaged assets but it can be done.

The regular backdoor Roth has always seemed crazy to me as well. I make too much money to contribute to a Roth IRA. So instead I contribute to a Traditional IRA and then the next day convert it to a Roth IRA. Seems like the income limitation isn't worth the paper it is written on.

The Mega Backdoor loophole makes that seem like pocket change though.

The corporate attorney and I have discussed the back door Roth Ira as well. We haven't tried it yet but we both do not qualify to put money into a roth ira. Is it really as simple as it sounds, put money into traditional and convert next day to a Roth? When I read about that back door it just seemed to be too good to be true.

 

[npaden]

The corporate attorney and I have discussed the back door Roth Ira as well. We haven't tried it yet but we both do not qualify to put money into a roth ira. Is it really as simple as it sounds, put money into traditional and convert next day to a Roth? When I read about that back door it just seemed to be too good to be true.

I’m putting money into a traditional IRA that is not deductible. Once it is in the traditional IRA I’m rolling it into a Roth IRA. It is very simple. I know Fidelity walks you right through the process.

You get a 1099 for the amount you transfer but you only have to pay tax on any earnings it had before you got it transferred.

I make too much to deduct my contribution and my wife doesn’t have any earned income but we can both do the back door Roth.

The hardest part is figuring out how to get it in the tax software correctly.

 

[rjthehunter]

1. Would you go to a "major media outlet" forum for hunting advice? (CNN, NBC, USA Today, CBS, etc.)

2. Would you go hunting forum for financial advice?

Wait, this is a hunting forum?