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Chevron Phillips 401(k): Mega Backdoor Roth Strategies

by , | Updated: Dec 5, 2023 | Published: Aug 16, 2023 | Insights

chevron phillips mega backdoor roth

Chevron Phillips 401(k): Mega Backdoor Roth Strategies

How Mega Roth Conversions Can Optimize Your Tax Treatment

 

One of the most effective ways to prepare for retirement is to maximize the usage of tax-advantaged retirement savings vehicles like an IRA or 401(k). However, “Maxing Out” your plan means something different for employees of certain companies. The RGWM team wants to highlight a unique tax planning opportunity for Chevron Phillips’ “Super Savers.” In general, many individuals we meet are frustrated by the low annual contribution limits for tax advantaged vehicles like their Traditional or Roth IRA or their 401(k).

At $6,500/year in an IRA and $22,500/year in a 401(k), most high-income savers wish there was a place to put their excess income above these limits but don’t know where.

Enter the Mega-Roth: a unique tax strategy with no upper limit on income for eligibility.

 

 

In what appears to be a significant change, the SECURE Act 2.0 enacted in December 2022 did not have language eliminating the Mega Roth strategy in the drafting phase or final legislation. We believe this bodes well for the ongoing availability of the strategy, which we will explore in depth below.

 

Chevron Phillips 401(k) Contribution Limits*pending changes from Secure Act 2.0

 

Mega Backdoor Roth Strategy

Most Chevron Phillips Chemical employees know they can contribute to their Savings Plan through pre-tax and Roth contributions. Employees can generally contribute up to $22,500 a year ($30,000 if age 50 or older) from their paycheck. People are less aware that the Savings Plan allows for additional after-tax contributions beyond this limit. Sometimes, these after-tax funds can be converted tax-free to Roth at your convenience. The Chevron Phillips Savings Plan, fortunately, is one of the retirement plans that allow for this capability.

HERE’S HOW IT WORKS:

  • Max-out your Pre-Tax or Roth contributions to the Savings Plan ($22,500 for 2023)
  • Receive an 8% matching contribution
  • Contribute After-Tax funds up to the IRS limit ($66,000 in 2023)
  • Convert After-Tax Funds to Roth Account

Consider this example:

A Chevron Phillips employee (let’s call him Bob) has a salary of $250,000. He contributes the pre-tax max of $22,500 to his Savings Plan for 2023 and receives an 8% match of $20,000 for a total of $42,500. This remains $23,500 below the IRS limit of $66,000. Let’s assume Bob then contributes $20,000 each year to the After-Tax account in the Savings Plan for five years – a total of $100,000. This money has grown over the five years to $150,000. Therefore, for conversion purposes, $100,000 is Bob’s contribution basis, and $50,000 is growth.

 

Tax Implications of Mega Roth Conversions

Uncle Sam isn’t far away whenever a citizen receives a tax-advantage. He wants to get his share of this windfall! The IRS has instituted a Pro-Rata rule that mirrors the one associated with a traditional backdoor Roth IRA.

If Bob were to withdraw the $150k After-Tax amount from the Savings Plan, he would pay ordinary income tax on the portion of the withdrawal that represents the growth ($50k). The same goes for a conversion from the After-Tax account to the Roth account. One-third ($50k/$150k) of any conversion will be taxable because that is the proportion of the value that is represented as growth.

Conversely, this strategy would be more attractive if Bob had completed annual conversions. If Bob were to make ongoing conversions before any growth occurred, these After-Tax assets would be placed into the Roth Account and compound tax-free permanently. As the chart above shows, qualified Roth withdrawals are always tax free.

In essence, Bob can use this strategy to permanently eliminate the tax on the growth of After-Tax assets!

 

The Catch

If there is one, the catch is that many people already have a current After-Tax balance in their Savings Plan. If you inadvertently contribute too much to the Pre-Tax or Roth accounts, the excess automatically rolls over to the After-Tax balance. While this does not prohibit you from taking advantage of this strategy, the After-Tax balance can grow over time and complicate conversion strategies.

Before making conversion decisions, it’s crucial to look on your Savings Plan statement to identify your After-Tax account balance and compare that to your contribution basis (the sum of your Pre-1987 and Post-1986 contributions). This will give you an idea of how the Pro-Rata rule comes into play for the taxation of conversions.

 

Need Some Help?

If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) professional regarding this strategy and how it applies to you, the Rhame & Gorrell Wealth Management team is here to help.

Our experienced Wealth Managers can help you review your financial and tax situation inside the Savings Plan and come up with a custom tax optimization strategy going forward – all at no cost to you!

Feel free to contact us at (832) 789-1100, [email protected], or click one of the buttons below to ask a question or schedule your complimentary strategy session today.

 

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JEFFREY G RHAME, CFP®

Partner & Senior Wealth Manager
As a Wealth Manager, Kyle McClain serves on the Investment Committee, interfaces with clients, and coordinates ongoing financial planning initiatives. He also facilitates many marketing and business development functions for the firm.

Prior to joining RG Wealth, Kyle spent time with Fidelity Institutional Asset Management as an Investment Consultant and with Merrill Lynch as a Wealth Advisor. He graduated Magna Cum Laude with a dual degree in Finance and Economics from the University of Alabama. He also completed his CERTIFIED FINANCIAL PLANNER™ program at Texas A&M University, holds the CFP® designation, and has completed his Certified Investment Management Analyst (CIMA®) designation from the Yale School of Management.


JEFFREY G RHAME, CFP®

Managing Director & Senior Wealth Manager

Jeff Rhame is one of the founders and President of Rhame & Gorrell Wealth Management. Jeff’s vision for starting Rhame & Gorrell was to deliver wealth management services and investment strategies typically available at the highest levels of wealth. Today, clients benefit from these sophisticated financial services, targeted to meet their unique needs.

Jeff leads a team of investment specialists that develop asset allocation strategies for high-net worth families. They seek out the most appropriate investment ingredients and then construct portfolios to meet our clients’ goals from income generation and capital preservation to tax-efficiency and growth.

Jeff has been honored with Top Professional’s Five Star Wealth Managers, recognized by The Wall Street Journal and Texas Monthly, for the last 10 years in a row and twice as Best of The Woodlands – Top Financial Advisors and Planners by Woodlands Online. For over 15 years, Jeff served as an adjunct professor for the University of Houston and Lone Star College Systems, teaching classes on Investment Management and Estate & Insurance Planning. As a member of the Financial Planning Association, he has also taught, and continues to teach, on & off-site retirement workshops for the employees of many Fortune 500 companies, such as ExxonMobil, Chevron.

Jeff is proudly serving as a member of three organizations: Memorial Hermann Hospital’s Advisory Board in The Woodlands, The Nelson Rusche College of Business Executive Advisory Board at Stephen F. Austin State University, and as the Vice-Chairman of the Tall Timbers District of The Boy Scouts of America.

Jeff received a degree in Accounting from Stephen F. Austin State University, and through post graduate work at The University of Houston, achieved his status as a CERTIFIED FINANCIAL PLANNER™ practitioner.

 

IMPORTANT DISCLOSURES:

Rhame & Gorrell Wealth Management is not affiliated with or endorsed by Chevron Phillips Chemical..

Rhame & Gorrell Wealth Management, LLC (“RGWM”) is an SEC registered investment adviser with its principal place of business in the State of Texas. Registration as an investment adviser is not an endorsement by securities regulators and does not imply that RGWM has attained a certain level of skill, training, or ability.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own CPA or tax professional before engaging in any transaction.  The effectiveness of any of the strategies described will depend on your individual situation and should not be construed as personalized investment advice.

For additional information about RGWM, including fees and services, send for our Firm Disclosure Brochures as set forth on Form ADV Part 2A and Part 3 by contacting the Firm directly. You can also access our Firm Brochures at www.adviserinfo.sec.gov. Please read the disclosure brochures carefully before you invest or send money.

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