Some nitty gritty retirement discussions going on some of the other threads. It's clear that some of the posters (Higney, Gunfighter, etc) have some detailed knowledge...hoping to start a discussion, without the generation war if possible, around the Mega Backdoor Roth option in the 401k.


TLDR - If a pilot is going to save for retirement in a taxable brokerage account, does it make sense to instead use the Mega Backdoor Roth feature of the 401k?


Assumptions, the pilot:

• Doesn't mind using the MBCBP for the "fixed income" portion of portfolio. Content to rebalance elsewhere to achieve desired assett allocation
• Plans to earn enough to fill up to/beyond 415c limit
• Prefers to maximize tax deferrals in the current year
• Plans to save above and beyond personal/company 401k contributions
• Is filling other available tax advantaged accounts (HSA, Backdoor IRA for self/spouse, etc)

For easy numbers, say you want to save another $60k towards retirement. If the goal is to minimize spill/MBCBP $, then all of that money will likely be saved in a brokerage account, and will be funded with income subject to taxes, SS, medicare, DPMA/ALPA dues, etc.

Consider instead, you cranked up 401a "After Tax" contributions in January/February (particularly if there is profit sharing on 2/14) to run the Mega Backdoor -> Roth maneuever in order to save the same $60k. Wouldn't this have the effect of maintaining ~ the same annual tax deferral (essentially pushing most of the 415c limit into the MBCBP) but allow that $ to go into a Roth account, while saving on payroll taxes & ALPA/DPMA deductions?

Seems like a good balance to arrive at retirement with more diversified silos of money, and should nullify RMD considerations for all but the biggest super savers.

Other than potential decreased liquidity by locking that $60k into a Roth account vs Brokerage any other downsides?

 

If I'm correct, what you're doing by maxing out early is basically forcing more money into the MBCBP. So yes, you'll have your 60k into your roth via the mega backdoor, but because you didn't opt out of the MBCBP 17% of your income for the rest of the year will go into it. If you had opted out you'd be paid the spill cash and could do with it what you like. However, if you're okay with 17% of your income after Feb/Mar when you hit the limit going into MBCBP then your plan sounds good.

 

I don't think there is any Megaback door Roth. You will pay taxes on that money one way or another. Best thing about a Roth is no RMD and you can take our large amounts without paying taxes. In the end the Government get their fair share, but since income tax is a percentage, you'll pay less, maybe, by paying those taxes now.

 

The mega back door is pushing as much into 401a and then rolling that out into a Roth IRA. If you're aggressive with it you can get close to all 69k into it per year.

 

Yep, this. You said it more succinctly than I did.

Presuming one doesn’t mind stuffing the MBCBP, this seems like a way to basically double the amount of tax protected space. Just trying to think it through to make sure I’m not missing anything.

 

If you 401a convert to Roth, the income tax is the same (probably 35% federal married filling jointly), SS is already maxed (0), and Medicare is 1.45%, Alpa 1.85%, DPMA is 0.60%. Obamacare tax will probably net 0 now vs future. Is it worth it to lock up that income that long when you’ll already have a big retirement account, presumably also with an income putting you in 32/35% brackets then anyway?

 

Good point on SS. Didn’t consider that. I think you’re right the rest is mostly a wash, with ALPA/DPMA being a small kicker in the contribution year.

The big diff is in the earnings. $60k/year for 20 years is $1.2M. 7% compounding over the same 20 years is $1.26M in capital gains. If you do it in a Roth account the tax bill is 0 vs whatever your LTCG rate is (likely 20%+)

That’s the interesting part and potentially worth the liquidity trade off you’re rightly pointing out. Really is the only downside I see.

Edit: Also, we have to pay taxes on that $60k this year either way. If not I probably wouldn’t be considering this, but all other things equal I’m thinking I’d rather stuff it into a Roth acct.

 

It sounds like a good approach with all of the caveats you outlined. Here are a few fill ins that may help round out the plan:

-If your balance exceeds contributions, the MBCBP can be rolled into an IRA at 59 1/2.
-A Roth IRA doesn't have the same legal protection as your 401k, but it will match or exceed the protections of the brokerage account it replaces,
-The 401a to Roth IRA can be taken one step further into a Roth SDIRA for an even wider range of investment options.

 

I believe you may be conflating two related, but separate issues:
- Maxxing out the 415c limits; and
- Money into the MBCBP


For the 2024 415c limit of $69K, some math applies: If you make (expect to make)--
--$345K+, then you will get the maximum possible company contribution of $58,650 ($345K x 17%), leaving you $10,350 short of the $69K limit (and everything above $345K puts 17% into the MBCBP)
--$270,588.24 - $344,999.99, you will get between $46,000 - $58,650 company contribution (@17%), leaving you $23,000 - $10,350 short of the limit (no unforced MBCBP contributions)
--$78,632.48 - $270,588.23, you will get between $13,367.52 and $58,650 company contribution (@17%), leaving you $55,632.48 - $23,000 short of the limit (no unforced MBCBP contributions)
--Under $78,632.48, you mathematically cannot hit the $69K max, considering the 75% limit on contributions (and MBCBP does not apply)

If you're in the first category, and you don't want "extra" money in the MBCBP, you need to make $10,350 (exactly) worth of elective deferral contributions (pre-tax) to the 401(k) sometime during the year. If you go over the $10,350, you will force the difference into the MBCBP later in the year (so, in this scenario, you'd want to wait at least until you've passed $345K, or the 31 Dec paycheck). You will get 17% of everything above $345K into the MBCBP.

[EDIT: I guess if you really don't want anything in the MBCBP, you could forgo the elective deferrals altogether and avoid any MBCBP contributions up to $405,882.35 of income. I'd be interested to hear any reason that supports this play, though--I can't think of one.]

If you're in the second category, and you don't want "extra" money in the MBCBP, you need to make the exact contribution (between $10,350 & $23K), and unless you have a very accurate way to project your pay (not typical for line pilots), you'll need to time it to get it done on the 31 Dec paycheck.

If you're in the third category, all of the second category applies, AND you'll need to make after-tax contributions to make up the difference (between $23K & ~$55.6K) in after-tax (401a) contributions

This was the situation before the MBCBP. For unknown reasons, we cannot designate a dollar amount, only a percentage amount for our contributions (I submitted a resolution via C44 to fix this; nothing heard since)--so, it requires monitoring carefully if you're in the second or especially the third category. This is what I did in years before the MBCBP. For the 31 Dec paycheck, keep in mind that the "buckets" get filled in the order 401(k) elective deferral; company contribution; 401a after-tax--you can't overfill the total, but you just might put yourself in a situation you don't want if you fill up too fast before 31 Dec, thus limiting your elective deferrals and/or forcing money into the MBCBP that wouldn't otherwise have done so.

NOW consider the MBCBP. It's actually straigtforward, once you've digested all of the above: if you want to avoid the MBCBP, do what was always the case to hit the limit on the 31 Dec paycheck, and you'll have done so. Two caveats: One, real-world vagaries in our pay can make it difficult to avoid over-funding (say) the 401a, which then forces later company contributions to the MBCBP and/or prevents further elective deferrals. Two, once you have the first-world problem of exceeding the compensation limit of $345K (2024), you cannot avoid money into the MBCBP.

Alternatively, if your goal is to get as much money into the MBCBP as possible--i.e., you want to max the $69K and put as much more as possible above that into a tax-deferred retirement vehicle--then simply up your contributions either to the 75% max (100% for profit sharing, minus taxes per the form they send out) or as high as your budget can stand (as small a paycheck as you need) for a given pay period. For current-year taxes, you'll want to ensure you hit the $23K elective deferral max before the overal $69K; if Roth is your goal, same answer into the Roth 401(k); if getting it out of Fidelity is your goal, max the 401a then roll it out (into a Roth IRA would be my first target if I went this route, but I'm a current-year tax guy). This has been my strategy since the MBCBP came into existence: I hit the limit on the 30 Sep paycheck (not going over), then Oct - Dec were 17% to MBCBP. For 2024, I've been maxxing everything in order to get the 17% for the rest of year flowing to the MBCBP.

Obviously, there's also a blended in-between option, where you make some amount less than 75% contributions to hit the limit early (but not "too" early), putting some extra money in the MBCBP, but not all that you theoretically could have.

"Everyone's situation will be different," as the standard disclaimer goes, along with "don't take financial advice from a pilot." Figure out which version works best for you. Good luck!

 

As a discussion point I think it comes down to WHY you are saving the money. Roth money is great once retired, but a brokerage can be used whenever. So do you want to retire early? Be able to create a legacy with cost/tax basis? Self insure beyond a certain age (like 45-65 if your wife or kids would still need some money until planned retirement age above just company life insurance)? Create retirement pots for tax efficiency if you end up living that planned long life?

Plenty to discuss beyond the low hanging fruit (HSA/RIRA/Spousal Roth). It all matters to a savers “why” for a strategy.