Got my first paycheck with $0 net pay

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VictorStarr
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Re: Got my first paycheck with $0 net pay

Post by VictorStarr »

Alto Astral wrote: Sat Jan 22, 2022 12:28 am This is how my paycheck is split:
50% after-tax (mega backdoor roth)
10% ESPP
10% pre-tax-401k
3% medical/dental/vision/hsa etc
27% tax

I wanted to frontload my mega backdoor roth. So I set it at 50% deduction from my paycheck. Little did I know that this will drop my paycheck to $0. I will do this for my next 6 paychecks and then stop. This helps me max out the $61k limit. I thought this was interesting and wanted to post on my most fav forum
Wow, it is pretty hard core.
With all uncertainty around mega backdoor Roth I decided to contribute the maximum to my Roth in H1 2022 so I choose 20% for after-tax 401K. In January my net pay was only 31% of the gross.
tibbitts
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Re: Got my first paycheck with $0 net pay

Post by tibbitts »

I don't understand the obsession with $0 vs. just some low amount. I wouldn't want to deal with the almost inevitable error condition when the net went negative for whatever reason.
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Re: Got my first paycheck with $0 net pay

Post by nordsteve »

My wife and I have a contest each year to see who can get their paycheck lower at the start of the year.

To make this a little bit more actionable, it’s really a tactic to get your money in the market earlier. Rather than having your annual contribution spread over the entire year, having them in the market at the start of the year on average to grow over the period that they’re in the market.

Of course, you do need to check the matching provisions of your 401(k) to verify that you received the entire match if you make out with a deposit at the start of the year as opposed to level contributions.
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

KlangFool wrote: Sat Jan 22, 2022 5:54 pm OP,

I choose to front load the pre-tax 401K first. In the case that I am laid off in 2022 and join some other employer, they may not have the mega backdoor Roth. But, I still could contribute to pre-tax 401K at the new employer and getting the match.

KlangFool
I am missing something since your calculations are flawless. Say, your annual salary was $82K and you saved 50% towards pre-tax 401k for 6 months. You would've front loaded the entire annual pre-tax limit of 20.5K in H1 2022 ($82k/6months*50%). If you changed employers in H2 2022, you would not be able to get an employer match with a new employer, right? Unless you front loaded a smaller amount that still lets you spread out contributions to get the typical employer match through the year (say, 4%).

OTOH, if you front load the 50% towards a mega backdoor, you get to contribute $20.5K with both employers (assuming the new employer offers it as well)
Last edited by Alto Astral on Sat Jan 22, 2022 7:28 pm, edited 2 times in total.
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

nordsteve wrote: Sat Jan 22, 2022 7:01 pm To make this a little bit more actionable, it’s really a tactic to get your money in the market earlier. Rather than having your annual contribution spread over the entire year, having them in the market at the start of the year on average to grow over the period that they’re in the market.
Exactly. For the longest time, I was in the DCA camp. This forum converted me:
Lump sum investing will always carry a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article,[5] studies indicate that lump sum investing has produced higher returns 66% of the time.
(source: https://www.bogleheads.org/wiki/Dollar_cost_averaging). I pretty much take the bogleheads wiki as gospel.
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Re: Got my first paycheck with $0 net pay

Post by sailaway »

tibbitts wrote: Sat Jan 22, 2022 6:35 pm I don't understand the obsession with $0 vs. just some low amount. I wouldn't want to deal with the almost inevitable error condition when the net went negative for whatever reason.
Most payroll systems will deal with the error with priority ordering, so that obligations (taxes, insurance, etc.) are met first.

We still don't obsess with zero. We don't being home enough to pay the bills when we are front loading, but we do bring home a couple of hundred dollars a month. This partly because we are pretty sure that the 401k is a higher priory than the ESPP, but due to the limit on ESPP, there isn't much room to make up for any shortfall.
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Re: Got my first paycheck with $0 net pay

Post by KlangFool »

Alto Astral wrote: Sat Jan 22, 2022 7:17 pm
KlangFool wrote: Sat Jan 22, 2022 5:54 pm OP,

I choose to front load the pre-tax 401K first. In the case that I am laid off in 2022 and join some other employer, they may not have the mega backdoor Roth. But, I still could contribute to pre-tax 401K at the new employer and getting the match.

KlangFool
I am missing something since your calculations are flawless. Say, your annual salary was $82K and you saved 50% towards pre-tax 401k for 6 months. You would've front loaded the entire annual pre-tax limit of 20.5K in H1 2022 ($82k/6months*50%). If you changed employers in H2 2022, you would not be able to get an employer match with a new employer, right? Unless you front loaded a smaller amount that still lets you spread out contributions to get the typical employer match through the year (say, 4%).

OTOH, if you front load the 50% towards a mega backdoor, you get to contribute $20.5K with both employers (assuming the new employer offers it as well)
Alto Astral,

<<If you changed employers in H2 2022, you would not be able to get an employer match with a new employer, right? >>

A) You can contribute another 20.5K with the new employer. It just that you would have to pay tax on this 20.5K when you file your taxes. So, you probably only contribute enough to receive employer match for the new employer.

B) My current employer match contribution from Trad 401K, Roth 401K, and after-tax 401K.

<<assuming the new employer offers it as well)>>

C) Most employers in my area does not offer mega backdoor Roth. Or, it is very limited. For example, only up to 12% of the gross pay. My current employer is the exception.

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Re: Got my first paycheck with $0 net pay

Post by KlangFool »

OP,

Are you sure that you are not subjected to the HCE limitation for Mega Backdoor Roth contribution? Please note that this limit exists even if you have a safe harbor 401K plan.

I know that I don't because I only work for my current employer for half year in 2021.

KlangFool
Last edited by KlangFool on Sat Jan 22, 2022 7:53 pm, edited 1 time in total.
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growthbogle
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Re: Got my first paycheck with $0 net pay

Post by growthbogle »

Yeah I do the same! Feels like I am fortunate to have an employer that provides this automatic after-tax 401K Roth-In-Place conversion in Fidelity! For living expenses, I end up liquidating my RSUs and that forces me to also divest from the company stock!
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

KlangFool wrote: Sat Jan 22, 2022 7:40 pm OP,

Are you sure that you are not subjected to the HCE limitation for Mega Backdoor Roth contribution? Please note that this limit exists even if you have a safe harbor 401K plan.

I know that I don't because I only work for my current employer for half year in 2021.

KlangFool
Thats for the heads up. I checked the definition (source = https://www.investopedia.com/terms/h/hi ... ployee.asp) and I don't believe I fit it. Nowhere close to top 20% compensated employee and light years away from holding 5% of the company.
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Re: Got my first paycheck with $0 net pay

Post by KlangFool »

Alto Astral wrote: Sat Jan 22, 2022 8:43 pm
KlangFool wrote: Sat Jan 22, 2022 7:40 pm OP,

Are you sure that you are not subjected to the HCE limitation for Mega Backdoor Roth contribution? Please note that this limit exists even if you have a safe harbor 401K plan.

I know that I don't because I only work for my current employer for half year in 2021.

KlangFool
Thats for the heads up. I checked the definition (source = https://www.investopedia.com/terms/h/hi ... ployee.asp) and I don't believe I fit it. Nowhere close to top 20% compensated employee and light years away from holding 5% of the company.
Alto Astral,

Please read the second bullet of your source.

<<Received compensation from the business of more than $130,000 if the preceding year is 2021 >>

If you earn more than 130K from this employer in 2021, you are most likely HCE.

Please confirm with your HR and 401K provider.

KlangFool
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celia
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Re: Got my first paycheck with $0 net pay

Post by celia »

Does your tax include OASDI? State?

I did that for a few months as I was leaving my last job, but if I didn’t withhold enough for required taxes, the tax-deferred contribution wouldn’t be withheld (for me it was all or nothing if you don’t have enough left in the paycheck to make the fixed dollar contribution).
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

KlangFool wrote: Sat Jan 22, 2022 8:59 pm
Alto Astral wrote: Sat Jan 22, 2022 8:43 pm
KlangFool wrote: Sat Jan 22, 2022 7:40 pm OP,

Are you sure that you are not subjected to the HCE limitation for Mega Backdoor Roth contribution? Please note that this limit exists even if you have a safe harbor 401K plan.

I know that I don't because I only work for my current employer for half year in 2021.

KlangFool
Thats for the heads up. I checked the definition (source = https://www.investopedia.com/terms/h/hi ... ployee.asp) and I don't believe I fit it. Nowhere close to top 20% compensated employee and light years away from holding 5% of the company.
Alto Astral,

Please read the second bullet of your source.

<<Received compensation from the business of more than $130,000 if the preceding year is 2021 >>

If you earn more than 130K from this employer in 2021, you are most likely HCE.

Please confirm with your HR and 401K provider.

KlangFool
I am assuming that its needs to be the combination of $130K AND top 20% as below. I will confirm with HR and 401k provider.
Received compensation from the business of more than $130,000 if the preceding year is 2021 (and more than $135,000 if the year is 2022), and if the employer so chooses, was in the top 20% of employees when ranked by compensation
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

celia wrote: Sat Jan 22, 2022 9:09 pm Does your tax include OASDI? State?

I did that for a few months as I was leaving my last job, but if I didn’t withhold enough for required taxes, the tax-deferred contribution wouldn’t be withheld (for me it was all or nothing if you don’t have enough left in the paycheck to make the fixed dollar contribution).
Yes. I double-checked and employee taxes include OASDI, Medicare, Federal Withholding, State Tax. It also deducted the tax-deferred contribution correctly. I triple-checked the total taxes against what was deducted in last month's paycheck (when the net pay was not $0) and its almost the same amount.
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Re: Got my first paycheck with $0 net pay

Post by tj »

Alto Astral wrote: Sat Jan 22, 2022 5:32 pm
imyeti2 wrote: Sat Jan 22, 2022 4:18 pm Is there any place to find which companies offer mega backdoor roth?
Here's a list of tech companies that offer it.

There is a reddit thread where users comment that companies such as FedEx, GM, Dow Chemicals, UTC, Cisco etc. offer it as well

I've also read on this forum that some state/federal government employers also allow this
The TSP definitely doesn't allow this. Perhaps the secondary 401k that some agencies offer, like the ncua or FDIC, do. 🤷🏻‍♂️
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

tj wrote: Sat Jan 22, 2022 9:37 pm
Alto Astral wrote: Sat Jan 22, 2022 5:32 pm
imyeti2 wrote: Sat Jan 22, 2022 4:18 pm Is there any place to find which companies offer mega backdoor roth?
Here's a list of tech companies that offer it.

There is a reddit thread where users comment that companies such as FedEx, GM, Dow Chemicals, UTC, Cisco etc. offer it as well

I've also read on this forum that some state/federal government employers also allow this
The TSP definitely doesn't allow this. Perhaps the secondary 401k that some agencies offer, like the ncua or FDIC, do. 🤷🏻‍♂️
True. In fact many plans are not very clear about this either. For example, my wife's plan allows a "Savings Account" where you can make after-tax contributions either via payroll contributions or lumpsum. It then lets her do an in-plan Roth conversion twice a year. We did not realize for many years that this was in fact a mega backdoor. Oh well, better late than never. We did a lumpsum last year towards it.
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Re: Got my first paycheck with $0 net pay

Post by danaht »

Congratulations. Wish my company offered the after tax 401k option.
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BrandonBogle
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Re: Got my first paycheck with $0 net pay

Post by BrandonBogle »

privateer79 wrote: Sat Jan 22, 2022 10:55 am
anon_investor wrote: Sat Jan 22, 2022 9:11 am
jharkin wrote: Sat Jan 22, 2022 8:14 am
anon_investor wrote: Sat Jan 22, 2022 1:12 am How do you manage living expenses? Save up late in the prior year?
At the OPs salary level they probably have large taxable accounts built up they can coast on.
Yeah, but presumably people don't want to sell investments to live off of if they don't have to during the accumulation phase.
maybe/ maybe not... if you don't have massive capital gains in taxable, you can view this as simply "transforming" existing accumulated assets from taxable accounts to Roth accounts.... would you rather have a dollar in taxable or a dollar in roth?

I think that this is especially likely given that MBD has just popped up in the last ~5 years or so.... so there are a lot of middle aged/ upper-middle class earners with a sizeable taxable accounts looking for shelter.
I did my first MBD about 15 years ago. Perhaps you meant it really gained momentum in the past 5 years or so.
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

BrandonBogle wrote: Sun Jan 23, 2022 9:32 am
privateer79 wrote: Sat Jan 22, 2022 10:55 am
anon_investor wrote: Sat Jan 22, 2022 9:11 am
jharkin wrote: Sat Jan 22, 2022 8:14 am
anon_investor wrote: Sat Jan 22, 2022 1:12 am How do you manage living expenses? Save up late in the prior year?
At the OPs salary level they probably have large taxable accounts built up they can coast on.
Yeah, but presumably people don't want to sell investments to live off of if they don't have to during the accumulation phase.
maybe/ maybe not... if you don't have massive capital gains in taxable, you can view this as simply "transforming" existing accumulated assets from taxable accounts to Roth accounts.... would you rather have a dollar in taxable or a dollar in roth?

I think that this is especially likely given that MBD has just popped up in the last ~5 years or so.... so there are a lot of middle aged/ upper-middle class earners with a sizeable taxable accounts looking for shelter.
I did my first MBD about 15 years ago. Perhaps you meant it really gained momentum in the past 5 years or so.
Also perhaps, more employers are allowing this now? In 15 years, this is the first 401k plan I had that offers this.
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BrandonBogle
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Re: Got my first paycheck with $0 net pay

Post by BrandonBogle »

Alto Astral wrote: Sun Jan 23, 2022 12:28 pm
BrandonBogle wrote: Sun Jan 23, 2022 9:32 am
privateer79 wrote: Sat Jan 22, 2022 10:55 am
anon_investor wrote: Sat Jan 22, 2022 9:11 am
jharkin wrote: Sat Jan 22, 2022 8:14 am

At the OPs salary level they probably have large taxable accounts built up they can coast on.
Yeah, but presumably people don't want to sell investments to live off of if they don't have to during the accumulation phase.
maybe/ maybe not... if you don't have massive capital gains in taxable, you can view this as simply "transforming" existing accumulated assets from taxable accounts to Roth accounts.... would you rather have a dollar in taxable or a dollar in roth?

I think that this is especially likely given that MBD has just popped up in the last ~5 years or so.... so there are a lot of middle aged/ upper-middle class earners with a sizeable taxable accounts looking for shelter.
I did my first MBD about 15 years ago. Perhaps you meant it really gained momentum in the past 5 years or so.
Also perhaps, more employers are allowing this now? In 15 years, this is the first 401k plan I had that offers this.
Could be. Sadly, 10 years ago, the same employer stopped offering it.

Back then, our choices were traditional or after-tax 401k. Then our choices became traditional or Roth 401k. I miss having the older option. I had gotten my in-service withdrawals set up nicely by the time they stopped offering the whole process. Another thing that came about with the plan change is that the plan became a Safe Harbor plan, so we no longer needed to worry about HCEs.
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

Could getting a $0 paycheck for 6 months cause an issue when I apply for a mortgage later this year? I plan to put 20% down and have it in a HYSA. I have other money in taxables, i-bonds etc but not cash.
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Re: Got my first paycheck with $0 net pay

Post by Bungo »

Alto Astral wrote: Sat Jan 22, 2022 12:28 am I wanted to frontload my mega backdoor roth. So I set it at 50% deduction from my paycheck. Little did I know that this will drop my paycheck to $0. I will do this for my next 6 paychecks and then stop. This helps me max out the $61k limit. I thought this was interesting and wanted to post on my most fav forum
I've done something similar a few times in the past when I worked part of the year as a consultant and then later got a full-time job and wanted to fully fund my 401(k) before the end of the year.
P&C actuary
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Re: Got my first paycheck with $0 net pay

Post by P&C actuary »

m0derton wrote: Sat Jan 22, 2022 7:58 am
Alto Astral wrote: Sat Jan 22, 2022 12:28 am I wanted to frontload my mega backdoor roth. So I set it at 50% deduction from my paycheck.
Wish I could do this, but my employer limits my total 401k contribution (pre-tax, Roth, and after-tax) to being no more than 30% of my base pay.
I wanted to do this for first 3 months of 2022 before retiring, but my employer limits after-tax to 10%. Pre-tax limit is 50%.
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Re: Got my first paycheck with $0 net pay

Post by rhubarbpie »

MathWizard wrote: Sat Jan 22, 2022 12:54 pm I've had zero net pay for several months the last 3 years.

I just got access to a Roth 457b in addition to my 403b.
Maxing the 403b brings my taxable income down to the top of the 12% bracket, so I load up the 457b with Roth.

My income is not so high that I need a backdoor Roth.

The accounting office called me the first time to ensure that I really meant to get zero net pay, to which I of course said yes
I'm doing something similar at my new job, which has access to a 401k (trad or Roth) as well as a 457b (trad only). You can contribute up to 75% of your salary to the 401k, but 100% to the 457, and the contribution limits of $20,500 are for each separately not combined. So I'm doing ~50% into a Roth 401k w/ matching, and ~40% into the 457; the rest goes to taxes and pays my health insurance premiums. It's been "fun" trying to calculate how much the taxes on the Roth contribution will be because that changes the amount that goes into the 457 which of course reduces the taxes...Oh yeah and I'm hourly, not salaried, so my gross income each paycheck is slightly different.

I have some cash from a previous house sale which I'm using to pay my expenses for the time being. When I use that up I plan to crank down my contributions, but I figure for the time being I'm basically converting taxable money to tax-free and tax-deferred money for later.
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Re: Got my first paycheck with $0 net pay

Post by GreendaleCC »

Alto Astral wrote: Sun Jan 23, 2022 1:05 pm Could getting a $0 paycheck for 6 months cause an issue when I apply for a mortgage later this year? I plan to put 20% down and have it in a HYSA. I have other money in taxables, i-bonds etc but not cash.
Your paystubs still show your gross pay, don’t they? Isn’t that what they’d care about?
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Re: Got my first paycheck with $0 net pay

Post by Grogs »

Alto Astral wrote: Sat Jan 22, 2022 7:25 pm
nordsteve wrote: Sat Jan 22, 2022 7:01 pm To make this a little bit more actionable, it’s really a tactic to get your money in the market earlier. Rather than having your annual contribution spread over the entire year, having them in the market at the start of the year on average to grow over the period that they’re in the market.
Exactly. For the longest time, I was in the DCA camp. This forum converted me:
Lump sum investing will always carry a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article,[5] studies indicate that lump sum investing has produced higher returns 66% of the time.
(source: https://www.bogleheads.org/wiki/Dollar_cost_averaging). I pretty much take the bogleheads wiki as gospel.
I agree with you about lump sum vs. DCA, but I don't think that's really what you're doing here. You're getting $0 in net pay, and as you say you're paying expenses from either saved money (that could have been invested earlier) or from your spouse's pay (that could be invested instead). So I agree that you're front-loading your MBD Roth, but possibly at the expense of delaying other investments.

In any case, congrats on being able to do this. I'm severely limited because of being an HCE, which my company defines as any employee who made over $135k gross in 2021. Luckily, the limit is high enough I can still max the pre-tax, but I can only get a few $k into after-tax 401k for the MBD. If I try to front-load my after-tax, I risk not reaching the pre-tax maximum at the end of the year.
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Re: Got my first paycheck with $0 net pay

Post by pasadena »

Grogs wrote: Sun Jan 23, 2022 2:29 pm I agree with you about lump sum vs. DCA, but I don't think that's really what you're doing here. You're getting $0 in net pay, and as you say you're paying expenses from either saved money (that could have been invested earlier) or from your spouse's pay (that could be invested instead). So I agree that you're front-loading your MBD Roth, but possibly at the expense of delaying other investments.
+1. I frontload both my pre-tax 401(k) and my Mega Backdoor Roth over the first 7 months of the year. But I understand that it means effectively backloading my taxable investments (and taxes).

There may be a slight advantage (in an up year, otherwise it'd be a slight disadvantage) due to frontloading the company match, but I'm not counting on that to make me rich :mrgreen:

At the end of the year, assuming I keep my job all year, I'll have saved exactly the same amount of money.
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

Grogs wrote: Sun Jan 23, 2022 2:29 pm In any case, congrats on being able to do this. I'm severely limited because of being an HCE, which my company defines as any employee who made over $135k gross in 2021. Luckily, the limit is high enough I can still max the pre-tax, but I can only get a few $k into after-tax 401k for the MBD. If I try to front-load my after-tax, I risk not reaching the pre-tax maximum at the end of the year.
How does your company enforce the contribution to the MBD for HCEs? Is it automatic or something you voluntarily calculate?

Are you also in the top 20% of all employees in your company? My gross is above that limit as well but its fairly common (say, over 50% folks in my company)
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Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

pasadena wrote: Sun Jan 23, 2022 2:45 pm
Grogs wrote: Sun Jan 23, 2022 2:29 pm I agree with you about lump sum vs. DCA, but I don't think that's really what you're doing here. You're getting $0 in net pay, and as you say you're paying expenses from either saved money (that could have been invested earlier) or from your spouse's pay (that could be invested instead). So I agree that you're front-loading your MBD Roth, but possibly at the expense of delaying other investments.
+1. I frontload both my pre-tax 401(k) and my Mega Backdoor Roth over the first 7 months of the year. But I understand that it means effectively backloading my taxable investments (and taxes).

There may be a slight advantage (in an up year, otherwise it'd be a slight disadvantage) due to frontloading the company match, but I'm not counting on that to make me rich :mrgreen:

At the end of the year, assuming I keep my job all year, I'll have saved exactly the same amount of money.
Isn't there the long term advantage though? The MBD growth will be tax free on account of being Roth. OTOH, the taxable investment will be taxed depending on when you sell. You could keep the taxable invested until you retire and then still pull off a 0% income tax, if your expenses permit it. In that case it would be exactly the same inside a MBD or outside.
pasadena
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Re: Got my first paycheck with $0 net pay

Post by pasadena »

Alto Astral wrote: Sun Jan 23, 2022 4:00 pm
pasadena wrote: Sun Jan 23, 2022 2:45 pm
Grogs wrote: Sun Jan 23, 2022 2:29 pm I agree with you about lump sum vs. DCA, but I don't think that's really what you're doing here. You're getting $0 in net pay, and as you say you're paying expenses from either saved money (that could have been invested earlier) or from your spouse's pay (that could be invested instead). So I agree that you're front-loading your MBD Roth, but possibly at the expense of delaying other investments.
+1. I frontload both my pre-tax 401(k) and my Mega Backdoor Roth over the first 7 months of the year. But I understand that it means effectively backloading my taxable investments (and taxes).

There may be a slight advantage (in an up year, otherwise it'd be a slight disadvantage) due to frontloading the company match, but I'm not counting on that to make me rich :mrgreen:

At the end of the year, assuming I keep my job all year, I'll have saved exactly the same amount of money.
Isn't there the long term advantage though? The MBD growth will be tax free on account of being Roth. OTOH, the taxable investment will be taxed depending on when you sell. You could keep the taxable invested until you retire and then still pull off a 0% income tax, if your expenses permit it. In that case it would be exactly the same inside a MBD or outside.
It's not a question of where the money is going, but when. I will invest money in both MBD and taxable this year. Since I front-load both my 401(k) and my MBD, I have to backload my taxable, but that doesn't change the amounts.

But I was comparing doing pre-tax 401(k) (with match) first, or MBD first.
jello_nailer
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Re: Got my first paycheck with $0 net pay

Post by jello_nailer »

ok, I'm not getting this.
Coulda been the Whiskey, might have been the Gin, coulda been the 3 or 4 beers I don't know...
Maybe someone can explain the mechanics of this?
Are you a W2 employee?
Assume your employer 401K has a Roth option?
Your 401K plan must have in-service withdrawals allowed?

So do you payroll deduct max the plan allows to Roth 401K, then you in-service withdrawal (roll) into your normal backdoor Roth account immediately?

For my Solo 401K at E*Trade I do have Roth authorized, not sure about the in-service withdrawal but I can check.

Appreciate someone setting me straight on this as I'd like to hit the max but my 20% limit on earnings won't get me there. Thank you.
KlangFool
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Re: Got my first paycheck with $0 net pay

Post by KlangFool »

jello_nailer wrote: Sun Jan 23, 2022 8:06 pm ok, I'm not getting this.
Coulda been the Whiskey, might have been the Gin, coulda been the 3 or 4 beers I don't know...
Maybe someone can explain the mechanics of this?
Are you a W2 employee?
Assume your employer 401K has a Roth option?
Your 401K plan must have in-service withdrawals allowed?

So do you payroll deduct max the plan allows to Roth 401K, then you in-service withdrawal (roll) into your normal backdoor Roth account immediately?

For my Solo 401K at E*Trade I do have Roth authorized, not sure about the in-service withdrawal but I can check.

Appreciate someone setting me straight on this as I'd like to hit the max but my 20% limit on earnings won't get me there. Thank you.
jello_nailer,

No, this is not Roth 401K. This is after-tax 401K.

There are 3 kinds of 401K accounts: Trad 401K, Roth 401K, and after-tax 401K.

For after-tax 401K, some plan offer

A) In-service Roth conversion to Roth 401K.

And/or

B) In-service withdrawal to Trad IRA and Roth IRA.

If you want to learn even more,

https://www.bogleheads.org/wiki/Mega-backdoor_Roth

KlangFool
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jello_nailer
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Re: Got my first paycheck with $0 net pay

Post by jello_nailer »

Thanks KlangFool.
I see my mistake. I need to check if I have after-tax provision in my Solo 401K, I have the other 2.
Appreciate the quick response.
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Topic Author
Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

jello_nailer wrote: Sun Jan 23, 2022 8:06 pm Coulda been the Whiskey, might have been the Gin, coulda been the 3 or 4 beers I don't know...
I was going to make a bad joke and compare pre-tax/roth/after-tax to whiskey/gin/beer. Better sense prevailed and I held back.

jello_nailer wrote: Sun Jan 23, 2022 8:23 pm Thanks KlangFool.
I see my mistake. I need to check if I have after-tax provision in my Solo 401K, I have the other 2.
Appreciate the quick response.
My after-tax allows for Roth conversions but NOT in-service withdrawals. While I can convert it into a mega backdoor roth, I cannot move it out so long as I am employed with this company.
KlangFool
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Re: Got my first paycheck with $0 net pay

Post by KlangFool »

jello_nailer wrote: Sun Jan 23, 2022 8:23 pm Thanks KlangFool.
I see my mistake. I need to check if I have after-tax provision in my Solo 401K, I have the other 2.
Appreciate the quick response.
jello_nailer,

But, you may not need this from your Solo 401K because you are the employer.

You have

A) Employee Roth 401K, Employee Trad 401K

And

B) Employer Trad 401K.

(A) is limited to 20.5K. (B) is not.

You should start a new topic and ask about your specific situation.

You can read more about Solo 401K at this link.

https://www.bogleheads.org/wiki/Solo_401(k)_plan

KlangFool
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Grogs
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Re: Got my first paycheck with $0 net pay

Post by Grogs »

Alto Astral wrote: Sun Jan 23, 2022 3:53 pm
Grogs wrote: Sun Jan 23, 2022 2:29 pm In any case, congrats on being able to do this. I'm severely limited because of being an HCE, which my company defines as any employee who made over $135k gross in 2021. Luckily, the limit is high enough I can still max the pre-tax, but I can only get a few $k into after-tax 401k for the MBD. If I try to front-load my after-tax, I risk not reaching the pre-tax maximum at the end of the year.
How does your company enforce the contribution to the MBD for HCEs? Is it automatic or something you voluntarily calculate?

Are you also in the top 20% of all employees in your company? My gross is above that limit as well but its fairly common (say, over 50% folks in my company)
They enforce it by limiting total 401k contributions to 16% of salary for HCEs. $135k*0.16 = $21.6k. So somebody just over the limit can max the pre-tax, but they won't be able to contribute much beyond that. Someone making $305k+ could contribute $48.8k under that system in theory, but they would probably get a good chunk refunded if the plan failed testing.

As for being top 20%, I suspect I'm not but I've never seen stats published. My understanding is that companies CAN use the top 20% thing as a threshold, but most(?) don't. I imagine places like doctor's offices and tech companies use it more often since they're top-heavy. If you are classified as an HCE you should have been notified, but you can always reach out to HR and ask if you're concerned.
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BrandonBogle
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Re: Got my first paycheck with $0 net pay

Post by BrandonBogle »

Grogs wrote: Sun Jan 23, 2022 9:04 pm
Alto Astral wrote: Sun Jan 23, 2022 3:53 pm
Grogs wrote: Sun Jan 23, 2022 2:29 pm In any case, congrats on being able to do this. I'm severely limited because of being an HCE, which my company defines as any employee who made over $135k gross in 2021. Luckily, the limit is high enough I can still max the pre-tax, but I can only get a few $k into after-tax 401k for the MBD. If I try to front-load my after-tax, I risk not reaching the pre-tax maximum at the end of the year.
How does your company enforce the contribution to the MBD for HCEs? Is it automatic or something you voluntarily calculate?

Are you also in the top 20% of all employees in your company? My gross is above that limit as well but its fairly common (say, over 50% folks in my company)
They enforce it by limiting total 401k contributions to 16% of salary for HCEs. $135k*0.16 = $21.6k. So somebody just over the limit can max the pre-tax, but they won't be able to contribute much beyond that. Someone making $305k+ could contribute $48.8k under that system in theory, but they would probably get a good chunk refunded if the plan failed testing.

As for being top 20%, I suspect I'm not but I've never seen stats published. My understanding is that companies CAN use the top 20% thing as a threshold, but most(?) don't. I imagine places like doctor's offices and tech companies use it more often since they're top-heavy. If you are classified as an HCE you should have been notified, but you can always reach out to HR and ask if you're concerned.
Also look to see if your 401k does anywhere reference "Safe Harbor". If someone has a safe harbor plan, the HCE restrictions don't apply.
barberakb
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Re: Got my first paycheck with $0 net pay

Post by barberakb »

What does safe harbor have to do with HCE?

And what constitutes being an HCE anyway? A certain income?

Thanks
MrJedi
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Re: Got my first paycheck with $0 net pay

Post by MrJedi »

Safe harbor plan does not "protect" for ACP test which is what is impacted by after tax / MBR contributions.
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Leif
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Re: Got my first paycheck with $0 net pay

Post by Leif »

Frame it.
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Topic Author
Alto Astral
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Re: Got my first paycheck with $0 net pay

Post by Alto Astral »

pasadena wrote: Sun Jan 23, 2022 6:04 pm It's not a question of where the money is going, but when. I will invest money in both MBD and taxable this year. Since I front-load both my 401(k) and my MBD, I have to backload my taxable, but that doesn't change the amounts.

But I was comparing doing pre-tax 401(k) (with match) first, or MBD first.
Ah, got it.
There may be a slight advantage (in an up year, otherwise it'd be a slight disadvantage) due to frontloading the company match, but I'm not counting on that to make me rich :mrgreen:
I see what you mean here now. If you DCA'd the 401k through the year, you would've got the company match in every paycheck. With front loading, now you need to wait till the end of the year when the company does the "true up".
pasadena
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Re: Got my first paycheck with $0 net pay

Post by pasadena »

Alto Astral wrote: Mon Jan 24, 2022 10:20 pm
pasadena wrote: Sun Jan 23, 2022 6:04 pm It's not a question of where the money is going, but when. I will invest money in both MBD and taxable this year. Since I front-load both my 401(k) and my MBD, I have to backload my taxable, but that doesn't change the amounts.

But I was comparing doing pre-tax 401(k) (with match) first, or MBD first.
Ah, got it.
There may be a slight advantage (in an up year, otherwise it'd be a slight disadvantage) due to frontloading the company match, but I'm not counting on that to make me rich :mrgreen:
I see what you mean here now. If you DCA'd the 401k through the year, you would've got the company match in every paycheck. With front loading, now you need to wait till the end of the year when the company does the "true up".
No, my company matches contributions as you make them - it’s not function of my salary (50% of contributions). So I will have gotten the full match whenever I max out the 401(k). This year that should happen by end of March.

This makes frontloading all the more interesting.
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