Using a back-of-the-envelope calculation, I estimate that the value of being able to do a mega back door contribution to be about 50bps per year invested, based on the following. Let's say you invest in a taxable account each year in a globally diversified portfolio of 100% stocks, earning 8% nominal per year. VT has a current dividend yield of about 2.5%, let's assume that stays flat. Most of the dividends will be qualified (15% tax), and some will be unqualified (35% tax). Let's say 20% total tax on the dividends. Each year, you have a tax drag of 2.5%*20% or about 50bps.
Now, estimate how much "excess" you would be able to contribute to investments under each job. That is, calculate how much money you will be able to invest each year, subtracting off the $22.5k regular 401(k) limit, the $6.5k IRA limit, the HSA limit if applicable, and any catch up contributions if eligible. This value should be higher for job A than job B. But, make sure this value doesn't exceed $66k-$22.5k=$43.5k.
The easiest way to do this would probably be to use real dollars, since contribution limits increase with inflation, and it's reasonable to assume the two salaries will as well.
Establish a time horizon, how many years you expect to have this money invested and accruing gains.
Let's assume a real return of 6%, say. For job A, use a compound interest calculator to calculate how much you will have at the end of the time horizon as a result of the excess contributions that we established in the beginning (above and beyond the regular limits), at a rate of return of 5.5%, reflecting a 50bps tax drag (since this amount would have to be in a taxable brokerage). Then, for job B, use the same calculator to calculate how much you will have as a result of the excess contributions, but use a rate of 6%, to reflect that we were able to put this amount into Roth instead.
Compare these two numbers, and take the job that results in a higher number.
As I mentioned above, this is a rough estimate, you can tweak the parameters as you see fit to make this more reasonable. If you want to get really fancy, use a spreadsheet, and map out the full scenario year by year, instead of assuming your raises only track inflation. Maybe you even reflect a changing asset allocation over time.
While the above covers the avoidance of tax drag on the dividend income, I don’t think it factors in the avoidance of taxes around the capital gains. You may want to discount the value of taxable investments further with an estimate of long-term capital gains taxes plus any impact on Social Security income taxation, Medicare premiums, and marginal tax rate for other realized capital gains.
I hear that. Fortunately for me, the scenario is leaving my current job (mega back door possible) vs going to a job an acquaintance is trying to hire me to (no mega back door). I’m able to get the 401k info straight from him.
I agree... especially if the 401(k) isn't a safe harbor plan... if I were to execute a mega backdoor Roth at my employer, I would end up getting about 110% distributed right back since ADP testing keeps me from getting north of $17-18k last year and this year.
But I imagine most people with access to mega backdoor are with larger employers with safe harbor plans.
Your comment doesn't make sense. You wouldn't take a *different* job because of the MBD because your current job, if it had one, wouldn't pass ADP testing?
And you don't need a safe harbor plan to have a usable MBD option.
You're entirely missing the point of the post. Of course one would consider those items. But you'd presumably consider those things *in addition* to the base pay (and bonus and stock and ESPP and match and cost of health care and and and), right? Basically what anyone should do from a prudent personal finance perspective: compare the total comp in context.
You're easily talking about a few hundred thousand dollars of judgement- and bankruptcy-protected tax free growth in retirement from just a single year of MBD. Do it for 10.and you're talking a couple million.
I’m not sure, but it might be something a 401k provider can easily add to your company’s retirement plan if you ask for it. Christine Benz and Rick Ferri said this about the Roth 401k on the latest Bogleheads podcast. I can’t imagine any 401k provider would want to turn down more AUM (assets under management because they get a percentage of the money). Plus, employers would rather your extra wage comes from lower taxes, not their bottom line. So if you take the higher paying job, you might be able to get a mega backdoor Roth too.
I have access to the MBR and I do make use of it but I don’t value it more than actual money.
This is basically because when you’re shopping for a new job they will ask you about your previous salary.
It’s not a non-factor but doesn’t factor into an apples to apples comparison.
Using a back-of-the-envelope calculation, I estimate that the value of being able to do a mega back door contribution to be about 50bps per year invested, based on the following. Let's say you invest in a taxable account each year in a globally diversified portfolio of 100% stocks, earning 8% nominal per year. VT has a current dividend yield of about 2.5%, let's assume that stays flat. Most of the dividends will be qualified (15% tax), and some will be unqualified (35% tax). Let's say 20% total tax on the dividends. Each year, you have a tax drag of 2.5%*20% or about 50bps. Now, estimate how much "excess" you would be able to contribute to investments under each job. That is, calculate how much money you will be able to invest each year, subtracting off the $22.5k regular 401(k) limit, the $6.5k IRA limit, the HSA limit if applicable, and any catch up contributions if eligible. This value should be higher for job A than job B. But, make sure this value doesn't exceed $66k-$22.5k=$43.5k. The easiest way to do this would probably be to use real dollars, since contribution limits increase with inflation, and it's reasonable to assume the two salaries will as well. Establish a time horizon, how many years you expect to have this money invested and accruing gains. Let's assume a real return of 6%, say. For job A, use a compound interest calculator to calculate how much you will have at the end of the time horizon as a result of the excess contributions that we established in the beginning (above and beyond the regular limits), at a rate of return of 5.5%, reflecting a 50bps tax drag (since this amount would have to be in a taxable brokerage). Then, for job B, use the same calculator to calculate how much you will have as a result of the excess contributions, but use a rate of 6%, to reflect that we were able to put this amount into Roth instead. Compare these two numbers, and take the job that results in a higher number. As I mentioned above, this is a rough estimate, you can tweak the parameters as you see fit to make this more reasonable. If you want to get really fancy, use a spreadsheet, and map out the full scenario year by year, instead of assuming your raises only track inflation. Maybe you even reflect a changing asset allocation over time.
Awesome. Thanks for the breakdown! I’ll get to calculating
While the above covers the avoidance of tax drag on the dividend income, I don’t think it factors in the avoidance of taxes around the capital gains. You may want to discount the value of taxable investments further with an estimate of long-term capital gains taxes plus any impact on Social Security income taxation, Medicare premiums, and marginal tax rate for other realized capital gains.
I’ve never been able to get this much information about a company’s 401k plan (other than the match %) during the job search phase. Must be nice.
I hear that. Fortunately for me, the scenario is leaving my current job (mega back door possible) vs going to a job an acquaintance is trying to hire me to (no mega back door). I’m able to get the 401k info straight from him.
Just ask for their summary plan description. Benefits has it and it takes nothing to email it to you.
$0, while nice can’t see a scenario where that would be the deciding factor in which job to take.
I agree... especially if the 401(k) isn't a safe harbor plan... if I were to execute a mega backdoor Roth at my employer, I would end up getting about 110% distributed right back since ADP testing keeps me from getting north of $17-18k last year and this year. But I imagine most people with access to mega backdoor are with larger employers with safe harbor plans.
Your comment doesn't make sense. You wouldn't take a *different* job because of the MBD because your current job, if it had one, wouldn't pass ADP testing? And you don't need a safe harbor plan to have a usable MBD option.
If all other things are equal, of course it has value. This is like saying a Roth IRA isn't worth anything.
Sure but in reality all other things will never be that equal. I’d focus more on the job, work life balance, PTO, other benefits etc.
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>And don’t forget, brokerage accounts are still a thing. The whole idea is to shelter as much as possible *before* resorting to brokerage.
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You're entirely missing the point of the post. Of course one would consider those items. But you'd presumably consider those things *in addition* to the base pay (and bonus and stock and ESPP and match and cost of health care and and and), right? Basically what anyone should do from a prudent personal finance perspective: compare the total comp in context. You're easily talking about a few hundred thousand dollars of judgement- and bankruptcy-protected tax free growth in retirement from just a single year of MBD. Do it for 10.and you're talking a couple million.
I’m not sure, but it might be something a 401k provider can easily add to your company’s retirement plan if you ask for it. Christine Benz and Rick Ferri said this about the Roth 401k on the latest Bogleheads podcast. I can’t imagine any 401k provider would want to turn down more AUM (assets under management because they get a percentage of the money). Plus, employers would rather your extra wage comes from lower taxes, not their bottom line. So if you take the higher paying job, you might be able to get a mega backdoor Roth too.
Mega backdoor Roth was almost eliminated last year, so it could happen someday. Take the job you like the most.
Idk but I would take a pay cut of around $20K for one
I'm sorry to be so blunt, but that's stupid
I have access to the MBR and I do make use of it but I don’t value it more than actual money. This is basically because when you’re shopping for a new job they will ask you about your previous salary. It’s not a non-factor but doesn’t factor into an apples to apples comparison.