The 401k is up to you. The 12% goes to a money purchase plan, allowing you to tax shelter more money.

 

Are the IRS limits separate between the money purchase plan and 401k? Could I put $58k in each for a total of $116k?

 

Both 401k & MPP combine for the contribution limit, which is $61k for 2022.

Additionally, the 2022 401k limit is $20.5k and 12% of the $305K compensation limit is $36.6k into MPP, leaving one $3.9k short of the $61k contribution limit for 2022 unless after-tax funds are booted.

 

In addition, you can also contribute up to 5 percent after tax contribution.

 

This is a great way to bridge the gap to maximizing the 401K contribution limit of $61K (for 2022). I am a few weeks out from hitting 2nd year pay so I ran some numbers on this. Just like Boiler said, if you are making $305K, the IRS compensation limit for an employer to contribute to a 401K (the employee can still contribute), you’ll be in this scenario. Contributing 1.28% ($3,900) will be the missing difference to get you up to $61K. See attached snapshot.

An important note about “UPS/IPA MPP” fund, which is also called an ATTD-After Tax, Tax Deferred, is that even though it’s after-tax dollars, like a ROTH, the earnings are taxed, unlike a ROTH. Fortunately, our plan with Fidelity allows for in-service conversion. You can take contributions and earnings made to the ATTD and roll over into a traditional IRA, then convert into a ROTH IRA (similar to a back door ROTH). You will owe taxes on any earnings that occurred since the money was sitting in the ATTD. If you do this on a regular basis (at least once a year), the taxes won’t be that big of a deal. Google search “Mega Back Door ROTH” for more details.

 

Here's another snapshot for a new FO like myself who’s not making $305K. The magic income number for me to max out $61K is $238,236. This is the income where at maxing out the ATTD at 5% can bridge the difference to $61K. It’s an important income number because once I start making more than $238K, I will want to start reducing my ATTD contribution down from 5%; otherwise, toward the end of the year I’ll prematurely hit the $61K contribution limit and UPS will no longer be able to contribute to the DC.

 

Fidelity has been letting me roll mine right into a Roth without a stopover in a traditional. This is the 3900ish amount. I don't know anything about an additional 5%.

 

Not to deflate our balloon, but we used to get "cash over cap" of an 11% contribution by the company. When you hit your irs limit, the company would start sending you extra checks. Not many people reached it, but some did. Now I'd venture to say we even have fo's that reach 305,000 and certainly Captains. Most of my peers are making at least 400,000 so for us the company contribution is not 12% but more like 9% or less.

There are creative ways to recapture that money. As income, as retirement medical, and I'm sure others. We haven't done that.

One of the early tenets of the ipa was that additional flying by a crewmember should not become cheaper for the company. We blew that here.

 

I've received conflicting answers from financial advisors about whether it was OK to roll directly into a ROTH IRA or necessary to first go to a traditional IRA then convert to a ROTH. Since I already have a traditional IRA set up for backdoor ROTH conversions, I just roll the ATTD into the traditional as well. It might be unnecessarily conservative extra step. I guess it depends on who at Fidelity is answering the phone that day.

The additional 5% is the same thing as the $3,900. 5% is the max paycheck deduction you can select. If you are making $305K+ and are contributing 5% into the MPP (ATTD), you will hit $3,900 well early in the year and will want to stop continuing to contribute since we don't get cash over cap.

 

Thanks. I had never heard of an MPP. Looks like there is no benefit in having an MPP rather than just a 401k with the same 12% contribution from the employer. I don’t work for UPS. I just checked and my company allows 20% to be contributed after-tax. I’ve been hitting the limit each year by contributing those after tax dollars and then doing the in plan conversion (mega backdoor Roth). I used to call up Fidelity once per month and send the after-tax money to my Roth IRA. I’ve since learned that Fidelity can set up auto in plan conversions. One day when I called to send the money to my Roth IRA I asked about it and they set me up. Now I don’t have to remember to do the conversation.