Are you a high-income earner at RTX (Raytheon Technologies) maximizing your pre-tax or Roth contributions to your RTX 401(k) over and above that valuable employer match? Great! However, did you know RTX offers a unique opportunity for a mega backdoor Roth? Some employer plans allow this option and RTX employees can use this significant benefit to boost their retirement savings, especially if they have excess cash and are already maximizing the $23,000 employee contribution amount if they are under age 50 and $30,500 if age 50+.
As financial advisors in San Diego, we regularly advise employees of Collins Aerospace, a division of RTX located here. With a deep understanding of the RTX 401(k) plan and RTX benefits, we’re here to guide you through the ins and outs of a mega backdoor Roth and implement the strategy in your retirement plan if you wish.
What is a Mega Backdoor Roth IRA?
A mega backdoor Roth IRA is a strategy individuals can use to save over and above the annual pre-tax or Roth 401(k) contribution limits. It allows employees to put additional savings in a Roth when they are no longer eligible to contribute due to higher income levels. You will pay taxes on any earned growth when you convert after-tax contributions to a Roth IRA; however, once the funds have been converted to a Roth account, you will enjoy tax-free growth afterward. Other benefits include:
- Roth account withdrawals are tax-free.
- There are no Required Minimum Distributions (RMDs) to take in your 70s, such as those on pre-tax 401(k) contributions, which are fully taxable — but be aware future legislation may affect this option.
- The strategy provides a legal workaround for high-income earners who have reached income and contribution limits to save more in a Roth IRA.
What are the annual contribution limits?
In 2024, the annual contribution limit of defined contribution plans like a 401(k) is $69,000, or $76,500 for those over age 50, including employee contributions and employer match. Employees can use a mega backdoor Roth to bridge the gap between the amounts to which they are currently contributing and receiving an employer match, and $69,000 or $76,500. See graphic below.
Who Should Use a Mega Backdoor Roth IRA Strategy?
A mega backdoor Roth IRA strategy is an effective savings opportunity if you have excess cash flow, can contribute beyond the standard 401(k) limits, and want to optimize tax-free growth. Consider a mega backdoor Roth if you’re a:
- High-Income Earner: Your income exceeds the Roth IRA income limits, making you ineligible for Roth IRA contributions. In 2024, if you earn more than $161,000 as a single filer and $240,000 as a married couple, you are no longer eligible to contribute to a Roth IRA.
- Young Professional: You’re a high-income earner early in your career and want to allow your contributions more time to compound and grow, setting you on a path to a strong retirement.
- Near-Retirement Professional: You want to catch up on your retirement savings and boost your retirement income.
In addition to the significant savings opportunity a mega backdoor Roth offers, leveraging the strategy helps create a balanced and diversified retirement income plan. We recommend every employee strive for a mix of financial buckets they can draw upon in retirement, including cash, taxable investment accounts, tax-deferred accounts like a 401(k), and tax-free accounts like a Roth, which can be accessed both through an IRA and 401(k).
How Does a Mega Backdoor Roth IRA Work?
A mega backdoor Roth may be available when you reach your annual 401(k) contribution limit and if your employer permits it. As of 2024, the option is available for RTX and Collins Aerospace employees. The strategy allows you to make after-tax contributions beyond the standard limit noted above.
How to Convert Your After-Tax Contributions
A crucial step, often overlooked, is requesting the conversion. Without this step, you may be leaving money on the table or missing an opportunity to save more for retirement.
Some companies automatically convert after-tax contributions. This is not the case for RTX; therefore, you must contact your benefits provider at 800-243-8135 to ensure they convert your after-tax contributions to a Roth IRA. Please note that you will pay taxes on the growth upon converting so it would be good to be well-informed on how this may impact your taxes in a given year. We suggest you talk to your financial planner or tax advisor before taking this step.
When Should I Do a Mega Backdoor Roth?
Ideally, we recommend implementing the strategy sooner rather than later in the year. This allows you to plan your contributions, track your savings, and ensure you’ve reached your savings target by year-end, more evenly throughout the year. However, if you have excess cash flow and are on track for a solid retirement, you can initiate a mega backdoor Roth anytime during the year. We suggest starting earlier in the year to balance more aggressive retirement savings with enough net pay to satisfy your ongoing living expenses.
If you’re uncertain about the timing or the intricacies of completing a mega backdoor Roth, consider consulting with a financial planner to discuss your options and make the most of this opportunity.
How Much Can I Contribute to a Mega Backdoor Roth?
The first step is determining how much additional contributions you can make, as the limit combines employee contributions and employer matches. Each individual’s contribution amount is dependent on various factors, such as the percentage of salary, which may fluctuate. Let’s review the annual employee and employer contribution limits of the RTX 401(k).
What Are the RTX 401(k) Annual Employee Contribution Limits?
In 2024, RTX employees may contribute as follows:
- Employees under 50: $23,000
- Employees over 50: $30,500 (includes the $7,500 catchup amount)
Also, RTX offers employees a 4% employer match for maximum contributions and employees receive an additional age-based employer match that ranges from 3 to 7%:
The RTX 401(k) retirement plan introduces some complexity when calculating your mega backdoor Roth number, especially for high-income earners or those in a high tax bracket.
We recommend working with a financial advisor who can review your paycheck, bonuses and other compensation, and circumstances to outline a customized contribution amount. A professional can also help you stay updated on new tax laws and legislation affecting contribution and employer match amounts.
CCMI Understands the RTX Retirement and Benefits Plan
We’re uniquely positioned to help RTX employees, which includes Collins Aerospace employees, navigate their RTX retirement and benefits. Kim Benson, a previous RTX employee, is familiar with the RTX 401(k) plan and thus often advises former colleagues on the program and shares her insights into common 401(k) situations employees may face. Additionally, having seen clients through various phases of their lives, she has seen how adopting strategies early on can pay off in the long run.
Everyone’s financial situation is different, and you may not fit the RTX employee type we’ve described. If you are not quite at the point of being able to fully maximize your 401(k), you may check out this blog with other scenarios: RTX (Raytheon Technologies) 401(K): 3 Scenarios Employees Should Consider – CCMI Creative Capital Management Investments (myccmi.com). Perhaps you have market concerns, are strained for cash flow, or have other specific needs. We can help review your situation to develop a custom action plan that addresses your circumstances. Our goal is to use our insights to help you avoid costly mistakes and make informed decisions. Here are some other ways we can help:
- Managing and exercising stock options
- Exploring tax-efficient strategies
- Reassessing your risk tolerance
- Diversification and asset allocation
- Integrating your RTX retirement and benefits into your overall financial plan
We invite you to have a complimentary conversation with our team of financial planning professionals to discuss your 401(k) options from RTX or another employer. Let us assist you in developing a comprehensive plan that considers all aspects of your financial life. Contact our team today to get started.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at https://myccmi.com/important-disclosures/
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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