Optimize Your Retirement Plan Contributions
As we approach the end of the calendar year, you only have a few months remaining to take advantage of certain planning opportunities.
In this four-part series, we’ll cover a range of planning topics that can help you save on taxes as you work toward achieving your financial objectives. If you’re a corporate executive, you’ll find that some of these topics are particularly relevant to you as year-end gets closer.
In our second blog post of the series, we discuss how you can use various strategies to help you make the most of your retirement plan contributions. Here are three proven strategies to consider.
401(k): Meet your match
Year-to-date, how much have you contributed to your 401(k) plan? The limit for employee contributions is $22,500 in 2023, plus an additional $7,500 if you’re age 50 or over (i.e., individuals aged 50+ may contribute up to $30,000 in 2023).1 If your company offers a match, we believe you should make every effort to contribute at least enough to receive the full match.
Employers may also contribute to a 401(k) through a match or via profit-sharing contributions. The 2023 IRS limit for total contributions by employer and employee combined is $66,000 if under age 50 or up to $73,500 if age 50 or over. Total contributions also may not exceed 100% of an employee’s compensation for a given year.2
Mega backdoor Roth: A way to tax-protect more retirement savings
Many companies now allow for “mega backdoor Roth” conversion strategies as part of their retirement plans. This strategy allows you to contribute your full employee contribution (in 2023, $22,500 if you’re under age 50 or $30,000 if you’re 50 or older)3 on a pre-tax basis. After you receive any employer contributions, your retirement plan may allow for a mega backdoor Roth conversion strategy in which you contribute after-tax money up to the combined IRS limit of $66,000 if under age 50 or up to $73,500 if age 50 or over.4 The after-tax contributions are then converted to a Roth account, either within the plan or outside it, which grows tax-free and can be withdrawn tax-free in retirement or under other specific circumstances.
For example, let’s say you’re 45 years old, earn $200,000 per year and have an employer match of 4% of your gross salary, and your company’s retirement plan allows for after-tax contributions with Roth conversions. If you wanted to maximize your contributions, you would contribute $22,500 on a pre-tax basis, get the $8,000 match and then contribute another $35,500 of after-tax money to meet the overall IRS limit of $66,000. Depending on the plan provisions, you would convert the $35,500 after-tax contribution to a Roth IRA (individual retirement account) inside the plan (called an “in-plan conversion”) or roll the after-tax dollars to a Roth IRA outside of the plan. You’d then enjoy tax-free growth on the converted balance going forward.
There are special rules on how long you need to wait before withdrawing the funds free of penalties, so be sure to talk with your financial and tax advisors about your specific situation.
Don’t forget IRAs
IRAs may be funded separately from your 401(k) and other employer retirement plans. While your income may exceed the limits to contribute to a Roth IRA directly, you may still make after-tax contributions to a traditional IRA and then convert the funds to a Roth IRA, known as a “backdoor Roth contribution.” Roth accounts are especially valuable as they have the potential to enjoy tax-free growth for long periods of time.
In 2023, for all your IRAs combined, you may contribute up to $6,500 if you are under age 50 or up to $7,500 if you are 50 or over.5 It’s important to note that if you already have pre-tax funds in your traditional IRA, anything you convert to a Roth IRA will be taxed pro rata based on the percentage of pre-tax and after-tax funds you have in your traditional IRA. Also, as with the mega backdoor Roth strategy, there are special rules for how long you need to wait before withdrawing funds so as not to incur fees or penalties. Talk to your Corient Wealth Advisor and your tax advisor for more details about converting funds from a traditional IRA to a Roth IRA.
Here to support you
The opportunities for year-end planning are many and varied, and each brings its own complexity depending on your particular circumstances. Be sure to engage your Corient Wealth Advisor, as well as any tax and/or legal advisors you may work with, to determine what strategies are best for you.
Other topics in this four-part series:
- Part 1: Coordinate Tax Planning with Your Financial and Tax Advisors
- Part 3: Plan Your Philanthropy
- Part 4: Review Your Gifting and Estate Plans
1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
2 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
3 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
5 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
ABOUT THE AUTHOR
Hope Carlson, CFP®, CAP®
Hope is a Partner, Wealth Advisor in our San Diego office. She joined legacy firm Dowling & Yahnke in 2017. She is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Chartered Advisor in Philanthropy (CAP®) designation.
Prior to Dowling & Yahnke, Hope spent six years as the chief development officer at the Museum of Us, overseeing fundraising and marketing. She also served as the interim executive director for the San Diego Civic Youth Ballet in Balboa Park and for four years as a strategy consultant with the Boston Consulting Group.
Hope holds a Master of Business Administration (MBA) from Harvard Business School, where she was a Baker Scholar, graduating in the top 5% of her class. She also obtained her Master of Music in Vocal Performance and Literature from the Eastman School of Music and a Bachelor of Arts in Economics with Highest Distinction from the University of Virginia.
Trained as an opera singer, Hope is passionate about music and the arts. She lives in La Jolla with her husband and two daughters.
Michael Brown
Mike is a Partner, Wealth Advisor in our San Diego office. He has more than 25 years of professional experience advising clients on strategic financial matters, including business exit planning, tax planning, generational wealth transfers and estate planning, investment management, charitable giving and retirement planning.
Mike joined legacy firm Dowling & Yahnke in 2012 and was a partner at Deloitte prior to that. He holds the Chartered Financial Analyst® and CERTIFIED FINANCIAL PLANNER™ certifications, is licensed as a Certified Public Accountant (CPA) and has a Master of Business Administration (MBA) degree from the Kellogg School of Management at Northwestern University. Mike completed his undergraduate work at Oakland University (Michigan), where he majored in accounting and graduated summa cum laude. He grew up in Michigan and enjoys outdoor activities such as golf and skiing. Mike has been married to his wife, Jennifer, for more than 25 years and has two daughters.
CONTENT DISCLOSURE
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Advisory services are offered through Corient Private Wealth LLC and its affiliates, each being a registered investment adviser (“RIA”) regulated by the U.S. Securities and Exchange Commission (“SEC”). The advisory services are only offered in jurisdictions where the RIA is appropriately registered. The use of the term “registered” does not imply any particular level of skill or training and does not imply any approval by the SEC. For a complete discussion of the scope of advisory services offered, fees, and other disclosures, please review the RIA’s Disclosure Brochure (Form ADV Part 2A) and Form CRS, available upon request from the RIA and online at https://adviserinfo.sec.gov/. We also encourage you to review the RIA’s Privacy Policy and Code of Ethics, which are available upon request.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.
