Unlocking the Benefits of a Mega Roth IRA for Nationwide Employees: A Pathway to Enhanced Retirement Savings

The mega backdoor Roth IRA is a strategy ‘highly compensated employees’ or HCEs at Nationwide can use to increase retirement savings and shelter investment growth from taxes in retirement.

When circumstances are right and the stars align, this little-known strategy can be a smart way to tuck extra money into a Roth IRA to use for retirement or to save for your heirs.

Let’s start with the basics.

Retirement Savings 101

When you choose to make Roth contributions, you’ll contribute to your account with after-tax dollars. This means you will pay taxes on the money the year it is earned, and you won’t benefit from any tax advantages at the time you contribute.

In exchange, you won’t owe any taxes on your contributions or when you withdraw in the future. Additionally, as long as your Roth contributions have “aged” for at least five years, any earnings your contributions accrue won’t be taxed either. (That said, if Nationwide made any contributions, you’ll still need to pay taxes on those when you withdraw, since you won’t have paid taxes on those contributions yet. Contributions made by Nationwide are always traditional, pre-tax contributions.)

The 2022 limits have changed since last year. A person younger than 50 can contribute $20,500 into their 401(k). People who are aged 50 and older can contribute an additional $6,500 annually in catch-up contributions, for a total of $27,000 into their 401(k). Limits for total employee and employer contributions have also increased over the past year and are $61,000 (or $67,600 for people 50 and older).

Some company 401(k) plans are structured to allow for additional after-tax contributions, which can create a “mega backdoor” through which you can invest up to an extra $40,500 into your Roth IRA or Roth 401(k).

We’ll walk you through how it works and if it’s a good move for you, but know now that this is complicated and advanced financial planning with the potential for some unexpected tax bills—definitely work with an expert on this one.

Is a Mega Backdoor Roth Possible ?

There are two prerequisites — if you’re unsure about either, double-check with HR or contact your Nationwide-plan administrator.

Your 401(k) plan must allow for after-tax contributions. Not all 401(k) plans let you make after-tax contributions. Quick vocab lesson: after-tax is an entirely different contribution category from pre-tax and post-tax. (We’ve mentioned before how after-tax and post-tax used to be conflated.)
Your 401(k) plan must also allow for in-service withdrawals or in-plan Roth conversions. In-service withdrawals (also called in-service distributions) enable you to take money out of your 401(k) while you’re still employed with Nationwide and roll it into a Roth IRA. In-plan conversions let you move your after-tax contribution into Roth dollars within the 401(k).

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Mega Backdoor Roth IRA Pros

Due to the dollar amounts, this strategy can really move the needle in your overall retirement savings and tax-free Roth asset bucket. Even if Nationwide only permits this for a few years, it can still be worthwhile, assuming it makes sense in the context of the rest of your financial situation
If you can keep the entire mega backdoor Roth strategy in-plan, it can be fairly easy to execute for the individual.

Mega Backdoor Roth IRA Cons

Most individuals don’t have the flexibility to maximize the benefits of this strategy, especially on an after-tax basis.
Even when individuals have the means to use this strategy, it might not work at the plan level. Essentially, your Nationwide-sponsored 401(k) plan must pass various testing requirements. This includes participation from ‘highly compensated employees’ or HCEs relative to ‘non-highly compensated employees’ or NHCEs. If only the HCEs are making after-tax contributions (as stands to reason), the plan may be forced to return a portion of the contributions to HCE participants if it fails the test.

How a Mega Backdoor Roth Works

The real limit on a contribution plan such as a 401(k) is actually pretty high: this year, it’s $61,000 (or $67,500 for people 50 and older). That max amount includes the $20,500 (or $27,000) employee elective deferral amount we’re most familiar with, as well as any matching contributions from Nationwide, profit-sharing, and your after-tax contributions.

When you use the mega backdoor strategy, you take all the money from the after-tax contribution to your 401(k) and quickly transfer it into either a Roth IRA or to Roth dollars within your 401(k) before it can accrue investment earnings. There are also some instances where a company’s highest earners wouldn’t be able to max out their after-tax contributions due to IRS nondiscrimination tests . If available once it’s in a Roth-style account, the money will grow tax- free instead of tax- deferred , which means you won’t end up owing taxes on those earnings, and neither will your beneficiaries. Pretty nifty.

Speed is key, which is why in-service withdrawals or in-plan conversions is one of the requirements. You don’t want to have to wait until you leave Nationwide to move that chunk of money.

NOTE: If you leave it as an after-tax contribution in your 401(k), it’s going to be accruing taxable earnings the whole time.

Doing the process manually is complicated, and we are here to assist.

Say you miss an in-service withdrawal or in-plan conversion and you’ve accrued some earnings. Not the end of the world. The IRS confirms you can shift the contribution portion into a Roth IRA and the gains portion into a traditional IRA, which takes some work, but you’ll preserve your contribution’s beneficial tax status.

Calculate Your After-Tax Contribution Amount

You’ll notice that we keep saying “up to $40,500” in additional contributions—that’s because everyone’s after-tax amount could be different. If you’re trying to make up the difference between the $20,500/$27,000 standard employee contribution amount and the $61,000/$67,500 max limit, you have to account for any matching by Nationwide and profit-sharing along the way.

Let’s walk through a couple of simple scenarios.

Henry, 57

Max limit, based on age: $67,500

Salary: $100,000

Profit-sharing: 25 percent of salary

At 56, Henry has higher limits. If he maxes out his $27,000 employee contribution and gets $25,000 from his employer, Henry has room for $15,500 in after-tax contributions.

Nancy, 44

Max limit, based on age: $61,000

Salary: $100,000

Employee matching: Up to 3 percent of salary

If Nancy maxes out the $20,500 employee contribution, and her company matches $3,000, that means Nancy has room for $37,500 in after-tax contributions.

Jason (60 years old)

Max limit, based on age: $67,500

Contributes the maximum annual amount to both his 401(k) ($27,000 in 2022) and his IRA ($7,000 in 2022). He is looking to save even more by using a mega backdoor Roth IRA contribution, but he wants to know the maximum amount of after-tax contributions he can put into his 401(k) plan. If his total annual employer matching contributions are $10,000 in 2022, Jason can make after-tax contributions of up to $30,500 this year. Assuming his 401(k) plan has the appropriate provisions, John would transfer his after-tax contributions to his Roth 401(k) or Roth IRA, allowing him to place an additional $30,500 in a Roth account receiving tax-free growth.

One caveat: Some 401(k) plans do limit the amount you can contribute after-tax, so even if you have room to contribute more, you might not be able to. There are also some instances where a company’s highest earners wouldn’t be able to max out their after-tax contributions due to IRS nondiscrimination tests , which are designed to ensure those earning the most aren’t saving at a higher rate than everyone else in their organization.

And it bears repeating after-tax contributions aren’t deductible, and if left in the 401(k) plan instead of being shifted into a Roth-style account, the earnings could be taxed when withdrawn.

When you should consider a mega backdoor Roth

Mega backdoor Roths are an interesting option for high earners at Nationwide looking for additional ways to save for retirement or for their heirs. It’s worth exploring with your financial planner if:

You’ve maxed out your personal 401(k) contributions. That comes first. When you’ve maxed out your contributions and still have more to save, you can consider going for a mega backdoor strategy.
You have additional funds you want to save for retirement. Mega backdoor Roths are a great way to store away cash every year. Still, there are many other financial strategies to consider, and things like time horizon and liquidity are important considerations.

What are the unique benefits provided by the Nationwide Retirement Plan that differentiate it from other retirement plans? How does Nationwide Mutual Insurance Company ensure the plan meets the regulatory requirements while still addressing the needs of its employees?

Unique Benefits of Nationwide Retirement Plan: Nationwide’s Retirement Plan provides both a Final Average Pay (FAP) Benefit and an Account Balance Benefit, which allows flexibility for employees hired at different times. The plan is qualified under Section 401(a) of the Internal Revenue Code, ensuring compliance with federal tax laws. Nationwide ensures regulatory compliance while addressing employee needs through ongoing contributions, actuarial evaluations, and options like lifetime income for retirees and survivors.

How can employee participation in the Nationwide Retirement Plan impact their overall retirement savings strategy? What role does the defined benefit pension plan play in conjunction with Social Security and personal savings for employees of Nationwide Mutual Insurance Company?

Employee Participation Impact: Participation in the Nationwide Retirement Plan enhances employees' overall retirement savings strategy by integrating Social Security, personal savings, and the defined benefit plan. The FAP benefit, based on final average compensation, works alongside Social Security to offer a stable income, while the Account Balance Benefit adds flexibility in retirement income options.

What options do employees of Nationwide Mutual Insurance Company have when they retire before the age of 55, and how do these options compare to those available for employees who retire after reaching that age? What factors influence the choices employees make regarding timing and type of benefit commencement?

Retirement Options Before and After Age 55: Employees retiring before age 55 can start receiving their benefits immediately, but they face early retirement reductions. Those retiring after age 55 may choose from more benefit options like annuities and receive higher, less-reduced payments. The choice to retire before or after age 55 depends on factors like financial need and health, and affects the timing and size of the benefit commencement(Nationwide Mutual Insur…).

In what ways does the structure of the benefit formulasâ€”Final Average Pay (FAP) Benefit and Account Balance Benefitâ€”affect the retirement income of employees at Nationwide Mutual Insurance Company? What are the implications for employees considering different retirement timings?

Effect of Benefit Formulas on Income: The FAP Benefit is based on Final Average Pay and Social Security coordination, offering a larger benefit for those with higher incomes, while the Account Balance Benefit is based on accumulated contributions and interest. The timing of retirement plays a crucial role in determining income, as early retirement results in reduced benefits, while late retirement allows for continued service accrual and potentially higher payouts.

How does the Nationwide Mutual Insurance Company address spousal benefits under the retirement plan, particularly regarding the Qualified Preretirement Survivor Annuity (QPSA)? What are the actions that employees need to take to ensure their spouses receive these benefits?

Spousal Benefits and QPSA: Nationwide offers a Qualified Preretirement Survivor Annuity (QPSA) to ensure that a spouse receives benefits if the participant dies before retirement. Employees must name their spouse as a beneficiary or obtain notarized consent if they wish to designate someone else. To ensure the spouse receives the QPSA, employees must take the appropriate legal steps outlined in the plan.

What steps must employees of Nationwide Mutual Insurance Company take to successfully file a claim for retirement benefits, and what is the timeframe for processing these claims? How does the company ensure that employees understand their rights under the Employee Retirement Income Security Act (ERISA)?

Steps to File a Claim for Retirement Benefits: To file a claim, employees must notify the Nationwide Retirement Center at Fidelity and submit the required paperwork. Claims are typically processed within 60 days, and Nationwide ensures that employees understand their rights under ERISA through detailed communications and support from Fidelity Investments.

What are the situations that might cause delays or loss of benefits for employees retiring from Nationwide Mutual Insurance Company? How can employees proactively manage these risks to ensure they receive their entitled benefits?

Situations Leading to Delays or Loss of Benefits: Delays can occur if employees fail to submit necessary paperwork, keep their contact information updated, or if they are not vested at the time of severance. Employees should proactively manage these risks by completing forms timely and maintaining communication with the Plan Administrator to avoid disruptions in benefits.

Can employees at Nationwide Mutual Insurance Company alter their distribution choices after commencing their retirement benefits? What regulatory frameworks influence their ability to change benefit elections, and under what circumstances might these changes be permitted?

Changing Distribution Choices After Retirement: Once retirement benefits commence, changes to distribution elections are limited. For example, lump-sum payments and annuity selections are typically irrevocable after commencement, and spousal consent is required for certain changes. Federal regulations, such as IRS rules, further restrict post-retirement changes in benefit elections(Nationwide Mutual Insur…).

How does the Nationwide Mutual Insurance Company plan for automatic post-retirement benefit increases, and what factors determine the percentage increase? How do these increases impact the long-term financial security of retirees?

Post-Retirement Benefit Increases: Nationwide offers automatic post-retirement benefit increases for participants with service before 1996, with annual increases between 0% and 3% based on fund performance. These increases help to protect retirees’ long-term financial security by adjusting their pension income for inflation.

How can employees contact NDPERS for more information regarding their retirement options, and what specific resources are available for personalized assistance? Clear communication channels and support services are essential for helping employees navigate their retirement planning effectively with NDPERS.

Contacting the Nationwide Retirement Center: Employees can reach the Nationwide Retirement Center at Fidelity by calling 1-800-238-4015 for inquiries about their retirement plan. Fidelity provides detailed support, including benefit estimates, plan information, and assistance with filing claims and selecting benefit distribution options(Nationwide Mutual Insur…).