Curious if you're maximizing your Amazon 401(k)? This is the only video you need to watch!
Top 3 steps to maximize your Amazon 401(k)!
1. Take advantage of your match
2. Maximize as much deferral as you can (max it out!)
Transcript:
Hi everyone, this is Nathan Donohue with Consilio Wealth Advisors. Today I'll be bringing you a quick guide to help you maximize your Amazon 401k.
The first thing that's important to note with the Amazon 401k is to make sure that you're taking advantage of employer matching, employer funds. Now currently Amazon will match 50% up to a maximum employee contribution of 4%. So, what this means quite simply is that if you contribute 4% to your 401k, Amazon will contribute 2%. It's a 50% match so a total of 6%.
Let's take an example where somebody has total cash compensation of $200,000. This will be a total of $12,000 over the course of the calendar year. These are effectively free dollars from the employer at a baseline minimum. This is something that we should encourage everybody to try and take advantage of.
The second component is to maximize the tax benefits through deferrals or contributions to the Amazon 401k. So currently in 2023, the most that you can contribute to a 401k through the Amazon plan and up to the IRS limits is $22,500. That is a combination of both pre-tax contributions and or Roth 401k contributions as well. The most you can contribute $22,500 for the 2023 tax year.
If we take our same example of somebody making $200,000 in total cash compensation, this would be a contribution rate of 11%. So, in this example, if that person contributed 11.25% to either the pre-tax and or the Roth side of the 401k, they would take full advantage, maximize all of the tax benefits that would come with both of those deferral options.
Now, the third component that is a little new for the Amazon 401k is what's called the after-tax to Roth 401k, or it's sometimes dubbed the mega backdoor Roth. This is new as of January of 2020 where Amazon employees have the ability to contribute above and beyond the traditional IRS limits. So again, for 2023, that's $22,500. Using this new strategy, you can contribute more than that.
So, I'll explain a little bit of how this works. So, let's take that example where individual at Amazon is maximizing their normal deferrals and they have total cash compensation of $200,000, so they are contributing the $22,500, they're also going to be getting a 2% match from Amazon that is an additional $4,000. So normally they'd be getting $26,500 going into the Amazon 401k. Now utilizing this after-tax to Roth strategy or the mega backdoor Roth strategy, the total that the IRS will let you and your employer contribute to a 401k for 2023, is $66,000.
Now we might just say, now, wait a minute, I thought the most I could defer was $22,500. That's true. That is your normal payroll deferral but in addition to that, with employer matching, profit sharing, or any after-tax contributions, the true limit the IRS will allow is $66,000. So, what this means in our example is that if we maximize our deferral at $22,500, we're getting a $4,000 employer match.
That leaves us with an additional $39,500 that we can contribute into the after-tax option for the Amazon 401k in this example, right? Now, if we contribute those after-tax contributions, what happens is those contributions get made into the after-tax component of the 401k, and there's also an option that will allow them to automatically convert those after-tax contributions to the Roth 401k.
With this conversion feature, those contributions now grow on a tax deferred basis and they are distributed at retirement tax free as well, provided they are converted to the Roth portion. The very important point here is that if you're looking at the contributions page for your Amazon 401k, you'll see the three contribution options, pre-tax, Roth and after-tax and just below that, there'll be a little dropdown menu asking you if you want them to automatically convert your after-tax contributions to Roth. If you're making after-tax contributions, you want to elect yes.
Please have Fidelity convert your after-tax contributions to the Roth 401k. What does this mean? What this means is that they will automatically take those after-tax contributions, convert them to the Roth. That means they grow on a tax-deferred basis and they are distributed tax-free at retirement.
If you do not make this election, you still receive the tax-deferral. You don't have to pay taxes as these assets continue to grow. However, at retirement, when you go to turn on that spigot and take distributions from your after-tax contributions, any gains, any dividends, any interest that you've accumulated along the way will be taxable as income, right?
So, it is a very, that one little button is the difference between having to pay taxes on your accumulation or have all of that accumulation be distributed tax-free. Very, very important.
So again, this has been a very quick guide to help to make sure that you're getting the most to getting the maximum out of your Amazon 401k.
Do you have any questions? Please feel free to reach out to our team. I hope you liked this video. If you did, please like subscribe. We've got a lot more content like this coming to you to make sure that you get the most out of your unique tech benefits. Thank you.
