If you work at Amazon and want to boost your retirement savings, you should consider my favorite Amazon employee benefit: the Mega Backdoor Roth. This can allow you to contribute an additional $40,000 or more into a Roth in 2023, regardless of your income level. A Roth account lets you enjoy tax-free growth and withdrawals in retirement, which can be a huge advantage for high earners.
The mega backdoor Roth strategy takes advantage of a special feature in Amazon’s 401(k) plan that allows you to make after-tax contributions and convert them to a Roth 401(K) within the plan.
Here are the steps to implement the mega backdoor Roth strategy at Amazon:
Implementing the Amazon Mega Backdoor Roth
Step 1– Max out your regular 401K contribution. The contribution limit for 2023 is $22,500. This contribution can be either a Roth or a traditional contribution. Most high earners elect the traditional (tax-deferred) contribution to lower their taxable income now.
Step 2- Get Amazon’s matching contribution. Amazon matches up to 2% of an employee’s salary (not RSUs). Let’s say you make Amazon’s former salary cap of $160K, the 2% match from Amazon would be $3,200.
Step 3- Make after-tax contributions up to the federal limit. The IRS sets a limit on the total amount of contributions that can go into a 401(k) plan each year. For 2023, this limit is $66,000. This includes your regular contribution, Amazon’s matching contribution, and any after-tax contribution you make. So, if you have already contributed $22,500 and received $3,200 from Amazon, you can still contribute another $40,200 on an after-tax basis. This means that you don’t get a tax deduction for this contribution, but you also don’t pay taxes on the earnings until you withdraw them. Note the after-tax contribution will vary depending on your salary and match amount from Amazon.
Step 4– Convert your after-tax contributions to the Roth 401(K). This is where the magic happens. Amazon’s 401(k) plan allows you to convert your after-tax contributions to Roth within the plan, using the “Convert After-tax to Roth” option. By doing this, you effectively move your after-tax dollars into a tax-free account, where they can grow and be withdrawn without any taxes in retirement. This is the mega backdoor Roth conversion!
Here’s another graphic showing how your total 401K contribution utilizing this strategy:
Amazon Mega Backdoor Roth Conversion for Employees 50 and Over
If you are 50 or older, you can contribute even more to your 401(k) plan by making catch-up contributions of up to $7,500 for 2023. This increases your regular contribution limit to $30,000 and your overall 401(k) limit to $73,500.
The mega backdoor Roth strategy is a powerful way to save more for retirement in a tax-efficient manner. Schedule a complimentary call today if you want to discuss implementing a backdoor Roth conversion or your financial situation.
Scott Caufield, CFA, CPA