Most physicians know that they are able to save *only* $23,500 into their employer sponsored retirement plan (typically a 401(k) or 403(b)). However, for many physicians, this is an underwhelming amount of money to save, given their need to save a healthy percentage of their income in tax-favored accounts. For example, a physician making $500,000 per year could save LESS than 5% of their income to their retirement plan.
What most physicians don’t realize is that the IRS actually limits retirement plan contributions to $70,000 in TOTAL (between employer and employee contributions)!
Most employers will offer some type of match or retirement plan contribution based on income. For example, an employer may contribute 5% of salary to the retirement plan annually. It’s important to note that, due to IRS rules, this 5% of income only covers the FIRST $350,000 of income, which would lead to an employer contribution of $17,500 (not the $25,000 one might expect if their income is $500,000).
This means that for a physician making the maximum contribution to the 403(b) or 401k(k), and getting a 5% contribution from their employer, their total contributions to the retirement plan for that year are $41,000.
As reference above, however, the IRS limits retirement plan contributions to $70,000 in TOTAL! So how could a physician contribute that additional $29,000?
This is where the “Mega” Back Door Roth strategy comes into play. For *some physicians they are able to defer an EXTRA percentage of their income to the after-tax part of the retirement plan. This does NOT count towards the $23,500 “elective” contribution, but does count towards the overall $70,000 annual contribution limit.
This strategy gives a high-earning physician a critical boost in their savings rate to their retirement plan, AND helps them accumulate more funds that grow-tax free. But it gets even better. For a well-designed retirement plan, those after-tax funds can be converted into the Roth part of the retirement plan, allowing funds to grow tax-free, AND be withdrawn tax-free in retirement.
To determine if you are able to implement this strategy, contact HR at your employer to obtain a summary plan description for your retirement plan.