Your TPMG Retirement Plan: Using the Mega Backdoor Roth Option

Utilizing the Mega Backdoor Roth feature within your TPMG (The Permanente Medical Group) Retirement Plan 3 can be a strategic move to bolster your retirement savings. The Mega Back Door Roth approach allows for additional after-tax contributions, which can subsequently be converted into a Roth IRA. This presents an opportunity for tax-free growth, even if you’ve already maxed out your traditional 401(k) contributions and found yourself “phased out” of Roth IRA contributions due to high income. The effectiveness of this strategy hinges on specific tax code provisions and your plan administrator’s willingness to facilitate immediate in-plan conversions on after-tax contributions. As you might expect, there are several limits and regulations governing the process.

Here’s a simplified breakdown of how a Mega Backdoor Roth IRA contribution typically operates:

Step 1. Traditional 401(k) Contribution (TPMG Plan 3):

Begin by contributing to your traditional 401(k) account. In 2023, the annual contribution limit for a traditional 401(k) is $22,500 for individuals under 50, or $30,000 for those aged 50 and above. TPMG employees and physicians often benefit from tax deferred savings in anticipation of retirement. While TPMG doesn’t add extra funds to your Plan 3, the “matching” component is contributed automatically to your Plan 2 account.

Step 2. After-Tax Contributions:

In addition to pre-tax contributions outlined above, the TPMG Plan 3 permits after-tax contributions. The total annual contribution limit for a qualified defined contribution retirement plan, inclusive of pre-tax, after-tax, and employer contributions, is $66,000 in 2023 for those under 50 and $73,500 for those aged 50 and above.

Here’s an example of how the contribution limitations might work:

  • Chris is a TPMG Physician (under age 50) earning $250,000 per year
  • Chris is under age 50 and makes the maximum pre-tax contribution to Plan 3/401(k) of $22,500
  • Also, Chris receives under the TPMG Plan 2 Match an additional $16,990 (5% on first $160,200 + 10% on everything over that).
  • Total contributions: $22,500 + $16,990 = $39,490.
  • $39,490 is contributed to the defined contribution plan leaving $26,510 ($66,000 – $39,490 = $26,510) of available room for elective after-tax contributions to TPMG Plan 3 for the year.
  • Based on this, Chris could elect to make just over $2,000 per month of additional after-tax contributions (up to $26,510) to his TPMG Plan 3.
  • Note that as the name suggests, the after-tax contributions here are not deductible and these amounts will appear as ordinary income on your paystubs and tax reporting documents.

Step 3. Conversion to Roth IRA:

TPMG Plan 3 facilitates immediate in-plan conversions, automatically converting after-tax contributions into Roth funds. A Roth conversion is a tax-advantageous move, as it permits after-tax contributions to grow tax-free.  Here, this conversion is not limited by income levels as it bypasses Roth IRA contribution phase-out limits (which can start at $138,000 of income for single taxpayers in 2023).

Step 4. Tax Considerations:

While the after-tax contributions can be converted to a Roth IRA tax-free, earnings on the Roth funds within the plan are subject to the 5-year rule for Roth conversions. The Roth IRA 5-year rule says you cannot withdraw earnings tax-free until it’s been at least 5 years since you first contributed to a Roth IRA account.

Participating in the Mega Backdoor Roth requires a surplus of cash flow and sustainable net after-tax savings rates.  This option is suitable for those with a substantial monthly cash flow surplus and a willingness to save these funds in a retirement account without immediate access to those funds. All Mega Backdoor Roth contributions should be viewed as long-term savings, offering a significant benefit for individuals with a long-time horizon and a growth-oriented investment strategy.

In conclusion, navigating the complexities of a Mega Backdoor Roth IRA contribution is best undertaken with the guidance of a financial advisor and/or tax professional. They can help you understand how the rules and limits apply to your specific situation, based on your employer’s 401(k) plan, and help to ensure compliance with the latest tax regulations, thereby optimizing the benefits of this strategy.

Contact a financial advisor at Capital Advantage to discuss your retirement plan in more detail and to see if a Mega Backdoor Roth is the right move for you.

Learn more about your TPMG (The Permanente Medical Group) Physician/Employee Retirement Plan Options.

Disclaimer: Capital Advantage, Inc. is not affiliated, associated, authorized, endorsed by, or in any way officially connected with Kaiser Permanente® or TPMG (The Permanente Medical Group)

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