Now is the Time for Exxon Employees to Look at Their 401(k) Balances
As we get closer to the end of the year, it is time to assess if and when Exxon employees should take advantage of a beneficial tax and financial strategy.
As we draw closer to the end of the year, Exxon employees tend to pay more attention to their retirement accounts and how much they contribute. This is because people start to hit the IRS 401(k) salary deferral annual maximum at the end of the year. For 2022 the maximum annual employee salary deferral is $20,500 ($27,000 for those over 50). This means that if you are making $300,000 at Exxon and are contributing 8% of your pay to your 401(k) plan, you will hit the IRS maximum sometime in October. After you hit this maximum, the IRS no longer allows Exxon employees to contribute to their Traditional or Roth 401(k) accounts. While it is nice to be able to put money away for retirement, this IRS annual salary deferral limit severely hinders Exxon employees’ abilities to store funds away for retirement.
The good news for Exxon employees is that they are allowed to make contributions to an After-Tax account after they hit their IRS contribution maximum. This is done through an election that allows any salary deferrals over the IRS limit for the year to be put towards this After-Tax account until the Exxon employee hits the IRS maximum retirement contribution limit. This limit for 2022 is $61,000 ($67,500 if you are over 50) and includes all the money put into an employee’s retirement accounts by that employee or Exxon. Using the example above, if an employee makes $300,000 and can hit the IRS salary deferral maximum in October, Exxon’s 401(k) match has put around $38,500 in their 401(k) account. This means they can put another $23,500 into the After-Tax account for the year. This is a significant benefit to Exxon’s 401(k) plan and allows Exxon employees to store more funds away for retirement.
Once the Exxon employee has hit the IRS maximum contribution limit for 2022, they will have money in either a Pre-Tax or Roth 401(k) account and an After-Tax 401(k) account. The Mega Backdoor Roth Conversion is a highly beneficial tax and financial strategy to use in this situation. This allows the Exxon employee to move all of the funds from the After-Tax 401(k) account and put them in a Roth IRA where they can grow tax-free. This conversion can only be done once a year, and the employee will only pay taxes on the growth in the After-Tax account at the time of the conversion. Please see our white paper for more information on how the Mega Backdoor Roth Conversion works.
Need Some Help?
If you’d like some help from a CPA or CERTIFIED FINANCIAL PLANNER (CFP®) advisor 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 401(k) 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 the button below to schedule your complimentary in-person or virtual strategy session today.