Many employees miss one of the most powerful wealth-building opportunities at Accenture, the after-tax 401(k) contribution.
Even though you may already be “maxing out” your 401(k), most people are only taking advantage of the pre-tax contribution or the Roth 401(k) contribution.
The maximum contribution is $22,500 in 2023, plus a $7,500 catch-up for those over age 50.
However, the contributions don’t have to end there as the federal maximum for employer + employee match is $66,000 per year, but the additional amount is company-dependent.
Some companies allow you to take advantage of this upper limit by making after-tax contributions.
Accenture is one of these companies, and they allow an after-tax 401k contribution of an additional $20,000 (in 2023) to a separate sub-account within your 401(k) plan.
While you won’t receive a tax-deferral on contributions, it does allow your earnings to grow tax-free.
Additionally, there’s another huge opportunity after this step most people miss out on, the ability to convert your after-tax 401(k) to a Roth IRA!
Accenture Executives make way too much money to contribute to a Roth IRA, but this planning move allows them to make “mega backdoor Roth contributions.” Let’s get into the details.
How to enroll in the Accenture after-tax 401(k)
Accenture’s program allows almost anyone within the company to contribute to the after-tax 401(k) in addition to their regular 401(k) contributions.
It’s easy, too; all you need to do is log in to your Live Well Accenture online account and elect to contribute. As mentioned earlier, you can contribute up to $20,000.
Consequences of after-tax 401(k) contributions
We already know Accenture Managing Directors have a huge cash flow issue due to the VEIP, but if they can solve this with stock sales, the after-tax 401(k) contribution should be on their list.
Unlike regular 401(k) contributions, which can contribute pre-tax income and lower your very high tax burden, the after-tax 401(k) contributions are taxed first.
If you’re already paying 50% tax between state and federal, your $20,000 contribution to the after-tax account will gobble up an additional $40k of your income each year.
Contributions to these accounts will create the same cash flow issue as the VEIP contribution.
Similarly, if you have access and contribute to the ESPP, it will have the same impact of lowering your take-home pay.
That’s why you need to ensure you have the cash flow figured out before you take on this additional program.
How after-tax contributions are taxed
Since you’ve already paid tax on the after-tax contributions, you won’t pay any additional tax later when you use the money.
Instead, only the earnings from these contributions are taxed.
Any earnings on top of the contributions will grow tax-free, but you’ll encounter the same rules as an IRA when you use the money.
If you’re older than 59 1/2, earnings will be treated as income, and you’ll pay the necessary taxes. If you’re younger and try to access this money, you’ll owe a 10% penalty on earnings in addition to income taxes.
Additionally, most plans allow you to remove after-tax contributions, but you’d owe tax on the earnings and could be penalized 10% on the entire amount if you’re younger than 59 1/2.
Converting after-tax contributions to Roth IRA
This is where things get really interesting.
Roth IRAs are incredibly powerful because they allow your earnings to grow tax-free, and when you remove the money after age 59 1/2, this extra income doesn’t add up anywhere on your taxes.
That means you don’t have to worry about increasing your social security taxes, subjecting yourself to the Medicare surcharge, or putting you in a higher tax bracket.
Roth IRAs typically aren’t available for high earners because of these advantages, yet you’re allowed strategies like this where you can make massive Roth contributions.
How to convert after-tax contributions to Roth
You can either call the benefits center and ask them to convert, or you can do it much faster through the online process.
To complete, go to your benefits site, click on “Savings and Retirement” and then click on the bottom link “Convert Savings to Roth”. You’ll click convert, then on the next screen select the full amount in the “After-tax 401k” category only.
There’s a $500 minimum conversion amount, and once the conversion is complete, you’ll have a Roth IRA sub-account within your 401(k) plan.
This sub-account is invested int he same investments as your regular 401(k) accounts.
After-tax 401(k) Roth conversion implications
The most important thing to be aware of is this: any earnings on top of your after-tax contributions will be taxed as income during the conversion.
If you contributed $30k in after-tax the last two years, and the balance has increased to $40k because of earnings, your $10k in earnings count as income.
For those in the 50% tax bracket when federal and state taxes are combined, you’ll need to come up with an additional $5k to pay the extra taxes.
However, after this is completed, you’ll have $40,000 converted to your Roth IRA sub-account, which can grow tax-free, and then you can access tax-free after 59 1/2 (as long as your account has been open for at least five years).
This is why it’s good to systematically convert every quarter, so the earnings won’t grow too much.
How much could this conversion save in taxes?
Let’s continue using the $40,000 example from above and say our example, Jen is 40 when she completes the conversion.
If her $40k investment grows at 8% for the next 20 years, she’ll have $186k in her Roth IRA when she’s 60.
She paid $5,000 in extra taxes to convert the full $40,000, so we’ll remove that from the growth ($186k – $40k).
By making these moves, she protected $146k ($186k minus $40k) of earnings and made them totally tax-free!
The Roth IRA account gives her a ton of flexibility as she can withdraw the money with zero repercussions.
If she’s an Accenture Exec planning to retire early, this could be a great source of cash to cover her needs before social security and the IRA RMDs.
Once again, make sure you work with a qualified professional (like me) before you take on these complicated moves.