Opening the Mega Backdoor Roth 401(k)

Americans are responsible for saving for retirement, and employer-sponsored defined contribution plans are intended to make it easier. Rules and limits are supposed to level the playing field, but they may also keep some people from maximizing their savings.

402(g) limits restrict the amount a participant can contribute to a 401(k) plan. Essentially, they only limit the higher-earning participant, as most people can’t afford to contribute up to the threshold. High-income participants need to find ways to save more for retirement, and although 402(g) contribution limits make it harder, proactive plan design can open the door to retirement readiness.


The 402(g) limit on 401(k) contributions for 2020 is $19,500; the limit on annual additions to a defined contribution (DC) plan for 2020 is
$57,000. The $37,500 gap between the two limits is where employer match falls, but it rarely makes up the entire difference.

Participants who want to maximize their retirement savings by filling in the gap can make after-tax contributions until they hit the $57,000 limit. Even in the few plans that allow this type of savings, however, few participants do so because the earnings on the after-tax savings are taxed as regular
income. If they save that money outside the plan, it is taxed at the lower capital gains rate.

What if there was a tax-friendly way to save up to $57,000 in a 401(k) plan?


Participants may make after-tax contributions to a qualified plan and then convert those contributions to a Roth 401(k). Upon conversion, any earnings
on the after-tax contributions are taxed; once in the Roth, all future earnings are tax-free-assuming the participant meets the Roth qualified distribution rules. And these contributions are not included in the 402(g) calculation, they can help fill in the gap.


  • The plan sponsor determines the number of conversions allowed per year.
  • At the time of distribution, the Roth funds must satisfy the five-year clock requirements.
  • The distribution must be taken after age 59 1/2 or upon death or disability.


Heritage Wealth Architects can help make it easier for people to save up to the defined contribution limits while optimizing taxes by using the mega
backdoor Roth 401(k) feature. In-plan Roth conversion provides an opportunity to fill the gap between the 402(g) limits and the defined contribution limits.

Let’s take the example of a participant in a plan with a 5% employer match; he earns $100,000 per year and maxes out his 402(g) contribution at
$19,500. With the employer match, his eligible DC contributions come to $24,500, falling $32,500 short of the $57,000 defined contribution limit.

This participant’s plan allows Roth conversions. Let’s say he wants to contribute another $10,000. He could make after-tax contributions to his 401(k) plan, and then convert it to Roth 401(k). If invests $10,000 and earns 2% prior to converting, for example, he would pay approximately $30 in taxes, and then all future earns would be tax-free.

This option provides tax diversity while allowing participants to contribute more than the 402(g) limit.

One challenge with the mega backdoor Roth 401(k) is that after-tax contributions must be included in the average contribution percentage (ACP) test along with matching contributions. It could be difficult to meet this requirement if only highly compensated employees (HCEs), or a large percentage of the HCEs,

To find out how Heritage Wealth Architects can help your participants with proactive plan design, contact Kurt S. Altrichter, CRPS®.

2Q Market Insights


Back in February, we discussed Congress’s power to draft and pass legislation, and the Federal Reserve’s tools to influence the liquidity of the economy. We also discussed how fiscal and monetary policy move the needle, while broader macroeconomic factors are the real drivers at play, as businesses make decisions to strengthen their viability for earning income in the short and long run.

We’re now seeing these forces play out to a great degree in the wake of the COVID-19 pandemic. As many folks know, two major forces in economics are supply and demand. Market economies rely on sellers and buyers reaching equilibrium between the availability of goods and services (supply) and the desire to consume those goods and services (demand). This is how markets create prices. Rapid changes to either supply or demand can affect the overall economic output of society and have the potential to cause recessions, or measurable decreases in economic activity. A demand shock is when individuals and businesses cut their spending due to decreased incomes or expectations of decreased income, and a supply shock is when the cost of production for goods and services increases suddenly. Demand shocks are often caused by widespread layoffs, and supply shocks are often caused by shortages in goods and services.

Over the last few months, the world economy and the United States have unprecedentedly experienced both a supply shock and a demand shock at the same time. The Consumer Price Index shows that prices (the equilibrium between supply and demand) have fallen, which corroborates a decrease in overall demand. Additionally, many goods and services simply aren’t available for consumption as many businesses have been forced to close and supply chains have been disrupted. In other words, consumers haven’t just cut their spending because of reduced income or precautionary savings, they’re also reducing their spending because things like restaurant meals and gym memberships aren’t available.

Fortunately, governments and central banks have tools at their disposal to combat demand shocks. In the U.S., the Federal Reserve slashed interest rates, lent out trillions of dollars through its various facilities, and added trillions to its balance sheet by purchasing assets. Congress has passed about $2.9 trillion in spending to incentivize employers to keep employees on payroll and health insurance, while also replacing incomes for those who find themselves unemployed or furloughed. By injecting trillions of dollars into the U.S. economy, the Fed and Congress have leveraged monetary and fiscal policy to a degree never seen before, particularly compared to the Great Recession. This spending has resulted in an incredibly large positive demand shock, possibly offsetting much of the damage from the negative demand shock. Despite putting money in people’s pockets, disposable income isn’t being spent as much as it was before the crisis, and many individuals and businesses haven’t felt the cash injection yet. This is where the supply shock is causing massive disruption. Think of your own personal situation: are you spending less right now than you did before? Is it because you’ve lost some income or are saving out of caution? Or is it because it’s impossible or unsafe to spend on the things you used to, like restaurants or travel? Or is it all of the above?

While much of the demand-side stimulus has helped, solving the supply side isn’t as easy. Giving consumers a safe way to participate in the economy, as both consumers and producers, will be critical in alleviating the lack of goods and services available for purchase. Individuals will need jobs and incomes, and consumers will need the confidence and means to spend their money. Re-opening businesses safely while promoting sanitation and social distancing will be vital but difficult. Increasing COVID-19 testing, monitoring the transmission of the virus, developing a vaccine will all help. These are just a few of the things we’re monitoring as many states enter phases one and two of re-opening.


Our staff has been working remotely for over two months now. One of our favorite aspects of working from home has been using video conferencing with our clients through Microsoft Teams. It’s easy to use, and everyone could probably use some face-to-face human connection!


Major League Baseball is working hard to hopefully start its 2020 season. The owners and the players’ association are currently debating how the new league format would function with fewer games in the regular season, implementing the designated hitter league-wide, and perhaps most interestingly, playing games without fans in attendance. This would mark the first time since 1981 that MLB has started a season late, although it did cut a season short in 1994. The Los Angeles Dodgers won the World Series in the shortened 1981 season and have led the National League in wins each of the last three seasons, while losing the World Series in both 2017 and 2018. Will 2020 be their year, or anybody’s for that matter?


We appreciate feedback from our clients and friends.  Is there anything you’d like to know?  Email us at or give us a call at 651.289.6444 and we’ll see to it.

Heritage Wealth Architects Acumen Bulletin April 2020

We’ve seen a lot in the last six or so weeks, most of it from the comfort (confines) of our homes.  In this Acumen, we will go through what we’ve seen thus far in investment markets answer some of the questions we’ve been hearing from clients, strategic partners and posing to ourselves along the way. 

As news of the virus and its spread developed, there was a rush for the exits in nearly every investment market and asset class, excepting cash and a few others.  The S&P 500 lost about 34% from its all-time highs at record speed in only about a 4-week stretch of time.  In the time since the initial drop to today, extraordinary measures have been taken by federal, state and even local governments to curtail the expected economic ramifications of keeping as many people as possible at home and decreasing the risk of further spiking cases of the virus. 

Distancing measures along with stay at home orders seem to be doing their part in slowing the reported fatalities and lending some relief to overwhelmed and underequipped hospitals.  This all seems to be giving warm and fuzzy feelings to the market of late as the market has gained back over half of what it lost in the initial drop.

First quarter earnings season began on Monday and we’ve just learned this morning that another 5.2 million people filed for unemployment claims last week, which is probably below the amount of people actually attempting to file, due to system backlogs.  Of course, we don’t have a crystal ball, but as actual data come to light on just how few people are able to work and how shelter in place orders are impacting corporate earnings so far and in the future, it would not surprise to see the equity markets take a bit of a pause, and perhaps, retrace back to where they came from in mid-March.

Here are some frequently asked questions we’ve been hearing throughout the last several weeks we thought we’d pass along our responses in case you had not yet asked us yet directly.

Q.  What have you done to portfolios since stocks began falling?

A.  The initial drop in equity, and even bond prices came fast and furious.  Toward the end of March, we noticed a bit of a relief rally forming, so took the opportunity to trim from some of our more volatile positions, loading up on “dry powder” to deploy over the coming months.

Q.  Why is the market up so significantly since its lows and did we miss out on a chance to buy?

A.  Admittedly, the 25% or so jump from the March low point has been a bit confounding. Last week, when 6.6 million (22 million have now sought jobless claims in the past month) new unemployment claims were reported, the market had its best week since 1938.  On the day the International Monetary Fund (IMF) projected the worst economic downturn since the Great Depression, stocks closed up nearly 4%.  We’re not in what I’d consider a normally functioning market.  That all said, we’ve seen similar market action before in previous recessions, and while history doesn’t always repeat itself, it often rhymes.  In past recessions, including 2008 and 2001, the market experienced an initial drop, followed by a relief rally, only to retest and/or break through the lows that were previously set.   

Q.  What do you intend to do to portfolios going forward?

A.  Practice patience.  We intend to rebalance accounts utilizing proceeds from fixed income positions that have held up better to buy equities at a discount, when it’s deemed prudent.  In addition, as mentioned, in many of our client portfolios we implemented a strategy to build cash to be deployed over the next weeks and months as opportunities present themselves.  We opted to insulate a portion of assets from further immediate drops and set ourselves up to capitalize on opportunities we think we might see down the pike.

As always, we hope you’re doing well and managing through this challenging time.  If you have a question or would like a check in with us, please let us know!  Drop us a line or give us a call.

Thank you from all of us at Heritage Wealth Architects.

We appreciate feedback from our clients and friends.  Is there anything you’d like to know?  Email us at or give us a call at 651-289-6444 and we’ll see to it.

April 03, 2020 COVID-19 Update

Updates regarding the two types of loans currently available to small businesses dealing with the economic consequences of COVID-19:

* SBA Economic Injury Disaster Loan (EIDL)
* Paycheck Protection Program (PPP) (also called SBA 7(a))
created by the newly signed CARES Act

The EIDL is already in place and you can apply through the Small Business Administration.

The PPP is available to small businesses and sole proprietors through SBA approved Financial Institution e.g. banks, credit unions as of today, Friday April 3, 2020. Applications for self-employed individuals and independent contractors are expected to be available from lenders by Friday April 10, 2020. 

Let us know how we can help you understand and evaluate these new programs and how they can help your business. If you have any questions, please feel free to call or email us.

April 01, 2020 COVID-19 Update

If you are a business owner, we want you to be aware there are two types of loans currently and (to be) available to small businesses dealing with the economic consequences of COVID-19:

  • SBA Economic Injury Disaster Loan (EIDL)
  • Paycheck Protection Program (PPP) (also called SBA 7(a)) created by Friday’s newly signed CARES Act

The EIDL is already in place and you can apply through the Small Business Administration.

The PPP is being developed and will be available for application through SBA approved Financial Institution e.g. banks, credit unions.  The SBA has 15 days from 3/27/20 to have the loan applications available.  You will need to contact your banking institution for an application when available.

The amount of information on these two programs on the internet is staggering and changing hourly.  We are working on staying informed to the most important aspects of these loans.  You can reach out to us for more specifics on each program.

Let us know how we can help you understand and evaluate these new programs and how they can help your business. If you have any questions, please feel free to call or email us.

March 30, 2020 COVID-19 Update

You may have heard about the historic relief and stimulus package passed last week.  Here are some of the most important provisions of the CARES Act that may affect our client and strategic partners:

March 24, 2020 COVID-19 Update

Here’s a useful chart showing the spread of confirmed cases of #COVID-19 in different countries from our strategic partners at Natixis Investment Managers. We recommend tracking the slope of the curve, or the rate of increase, for each country. We’re looking for when Western countries begin to flatten the curve like South Korea has done.