Mega Roth Contributions Through BAE Systems 401(k) Plan

Mega Roth Contributions Through BAE Systems 401(k) Plan

March 31, 2021

High-earners at BAE Systems have an opportunity to save an additional $20,000 or more into tax-advantaged retirement accounts through the BAE 401(k) Plan. We want to show you another way to secure your retirement.

Why Roth?

Roth IRA is a near-ideal retirement account given tax-free growth and tax-free withdrawal. Roth is favorable to taxable accounts as it is not exposed to annual dividends and capital gains tax. Sheltering retirement dollars from taxation offers the highest potential for growth and achieving financial goals.

What is a Mega Roth Contribution?

Certain provisions within the BAE 401(k) Plan allow participants can save up to $58,000 per year ($64,500 over 50 years old) by introducing Non-Roth After-Tax contributions. Those Non-Roth After-Tax contributions can then roll over to Roth inside or outside the 401(k) plan depending on age.

Who is a candidate for Mega Roth Contributions?

BAE employees who maximize traditional contributions. Below is an example:

Employee Elective Deferral

Employee Elective Deferral

$19,500.00

Age 50+ Catch-up Provision (if eligible)

$6,500.00

BAE Company Match (6% at $120k salary)

$7,200.00

BAE Profit Sharing Program

$0.00

Total Traditional Contribution

$33,200.00

Candidates are typically in peak earning years, seek long-term financial independence, and looking to leverage tax-advantaged investment growth.

How much can a Mega Roth candidate save into the plan?

Per IRS, participants can contribute $58,000 per year ($64,500 over 50 years old) from all contribution sources (employee and employer). Below is the same chart as above with the addition of the Mega Roth contribution and IRS Maximum Limit.

Employee Elective Deferral

$19,500.00

Age 50+ Catch-up Provision (if eligible)

$6,500.00

BAE Company Match (6% at $120k salary)

$7,200.00

BAE Profit Sharing Program

Unknown

Total Traditional Contribution

$33,200.00

(plus) Mega Roth Opportunity 

$24,800.00

IRS Maximum Contribution Limit (over age 50 can add $6,500)

$58,000.00

How does Mega Roth work in practice?

Mega Roth is predicated on three important provisions of the BAE 401(k) Plan:

  • The allowance of Non-Roth, After-Tax contributions,
  • In-service withdrawal after age 59 ½, or, In-Plan Roth Rollovers, and
  • The allowance of Roth inside the 401(k) Plan.

BAE Mega Roth

Participants can defer salary into a Non-Roth After-Tax account within the 401(k) plan just like traditional contributions. These dollars are contributed after-tax like Roth, but do not have the same tax treatment. These contributions reflect on your paystub and year-end W-2.

Unlike Roth, upon distribution, Non-Roth After-Tax investment gains are taxed at ordinary income tax rates. If a participant contributes $20,000 Non-Roth After-Tax and the account grew 10%, then $2,000 would be taxable upon converting to Roth either in the 401(k) plan or outside of it (post age 59 1/2).

Mega Roth in Practice

This is a two-step process. Non-Roth After-Tax contributions are made via salary deferrals and in-service withdrawals or in-plan rollovers complete the Roth contribution process.

A reasonable strategy is to build Non-Roth After-Tax contributions along with traditional contributions throughout the year. Then, periodically, submit a request to transfer the Non-Roth After-Tax portion to Roth.

Food for Thought

  1. Roth avoids “tax drag”. Saving into taxable accounts exposes investors to annual taxable dividends and capital gains which diminishes investment return.
  2. Roth serves as an excellent tax planning tool when modeling efficient retirement income strategies.
  3. BAE Systems is unique. Not all company plans have the provisions necessary to execute Mega Roth but more companies are adopting in our review.

I am interested in the strategy and want to meet with Acorn Financial

Acorn Financial is in Nashua, NH. We are a fee-only financial planning and investment management firm. We work with successful families and businesses in the region who are committed to financial independence. Our first meeting is always free and we welcome your interest.


Here is our contact information:

Acorn Financial

Drew Hefflefinger, CFP®

400 Amherst Street, Suite 303

Nashua, NH 03063

(603) 816-3404

drew@acornnh.com

www.acornnh.com


Advisory services offered through Commonwealth Financial Network, a Registered Investment Adviser.