The mega backdoor Roth is a great planning tool for high earners to get more money into tax advantaged accounts. Amazon employees can contribute up to $37,300 into a Roth 401K account in 2022 with the Amazon mega backdoor Roth conversion. In prior years, Amazon’s 401K plan limited deferrals to 10% of an employee’s salary, making the backdoor Roth contribution much smaller. In 2022, Amazon significantly increased their maximum salary and removed the 10% deferral limit!
Implementing the Amazon Mega Backdoor Roth
Step 1– Maximize your traditional 401K contribution. The contribution limit for 2022 is $20,500. This contribution can be either a Roth or traditional contribution. Most high earners elect the traditional (tax deferred) contribution.
Step 2- Amazon will match 50% of your contributions up to 4% of your eligible pay. If you’re hitting the maximum contribution limit and deferring more than 4% of your salary, Amazon will make a matching contribution of 2% of your salary. For instance, if an employee had a salary of $160K that would equate to a $3,200 match.
Step 3- Make after-tax contributions up to the federal limit. The federal limit for total contributions to a 401K for 2022 is $61K. For an employee making $160K who has already contributed $20,500 and received a $3,200 match, an additional $37,300 can be contributed. This contribution will be made on an after tax basis (meaning you receive no deduction from your taxable income for this contribution).
Step 4– Convert your after-tax contributions to a Roth. In Amazon’s 401K plan you select the option for Roth in plan conversion by electing to convert after-tax to Roth. Then you’ve completed the mega backdoor Roth conversion!
Here’s an illustration of what the mega backdoor Roth looks like for an Amazon employee making a salary of $160K:
Amazon Mega Backdoor Roth conversion for employees 50 and over
Those aged 50 and over can make additional catch-up contributions to their 401K plan of $6,500 for 2022. That means the traditional contribution component rises to $27K and the overall 401K limit increases to $67,500.
Here’s an illustration of what the Amazon mega backdoor Roth looks like for an employee 50 or older with a salary of $160K:
If you want to discuss implementing a backdoor Roth or your financial situation, schedule a complimentary call today.
Scott Caufield, CFA, CPA