Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

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What features does your firm’s plan have?

After-tax contributions AND in-service distribution to Roth IRA
12
18%
After-tax contributions AND in-plan conversion to Roth 401(k)
8
12%
Only allows after-tax contributions
12
18%
Does not allow after-tax contributions
35
52%
 
Total votes: 67

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Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 1:48 pm

I’m curious to see how many of the top biglaw shops have a 401(k) plan that facilitates MBDR contributions. Either of the poll’s first two options get the job done; the third option (solely after-tax contributions) should still do the trick, though your tax-free growth and immediate penalty-free withdrawal of principal won’t start until you leave the firm.

Feel free to anonymously comment any specific firms.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 2:48 pm

K&E does not. Honestly, I would be shocked if anything beyond a small minority of the V100 did. This is an area where law firms are woefully behind tech firms (besides the fact that we are just straight up falling behind in pay). The present value of 15% long-term capital gains tax savings on $37,500, which is what you'd be allowed in additional contributions after you top-up your traditional 401(k), compounding at 10% per year for 40 years is something like ~75k. Don't quote me on that. I'm not in finance for a reason, but it's a significant portion of value that firms could be allowing us to have without actually raising salaries but for the fact that biglaw firms are total dinosaurs in this regard.

For current law students, if you're picking between two interchangeable V100s, picking based on this actually makes more sense than context-less differences in Vault ranking or whatever little glimpse of culture that you can observe during a callback. If a V50 offered you 30k/yr more than a V20, you might reconsider that V20 offer. Wouldn't you? This is basically that. Post-offer and pre-acceptance both as a 1L (now 2Ls) and after your SA are the two times where you have incredible power. Ask about this. If I were lateralling and had a choice between roughly equal firms, this would be one of my top criteria.

Instead of demanding NYC to 200k, we should be asking for shit like this since it's cheaper for firms to provide and provides higher bang per buck for every dollar spent by an employer. NVIDIA, not even a top-tier tech employer, tops up HSAs and throws $6,500 (maximum legally allowed) into your 401(k) regardless of contribution. FAANG and even dinosaurs like GM and FedEx allow the Mega Backdoor Roth. We have to basically at a Wachtell & co. just to get a lousy 401(k) match.

If you're at a top firm, take note. This is how you attract high quality candidates without changing the whole compensation landscape.

We should really be taking a name and shame approach to this.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 3:03 pm

I was surprised to learn that Latham allows for it.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 3:20 pm

Anonymous User wrote:
Sat Sep 12, 2020 2:48 pm
K&E does not. Honestly, I would be shocked if anything beyond a small minority of the V100 did. This is an area where law firms are woefully behind tech firms (besides the fact that we are just straight up falling behind in pay). The present value of 15% long-term capital gains tax savings on $37,500, which is what you'd be allowed in additional contributions after you top-up your traditional 401(k), compounding at 10% per year for 40 years is something like ~75k. Don't quote me on that. I'm not in finance for a reason, but it's a significant portion of value that firms could be allowing us to have without actually raising salaries but for the fact that biglaw firms are total dinosaurs in this regard.

For current law students, if you're picking between two interchangeable V100s, picking based on this actually makes more sense than context-less differences in Vault ranking or whatever little glimpse of culture that you can observe during a callback. If a V50 offered you 30k/yr more than a V20, you might reconsider that V20 offer. Wouldn't you? This is basically that. Post-offer and pre-acceptance both as a 1L (now 2Ls) and after your SA are the two times where you have incredible power. Ask about this. If I were lateralling and had a choice between roughly equal firms, this would be one of my top criteria.

Instead of demanding NYC to 200k, we should be asking for shit like this since it's cheaper for firms to provide and provides higher bang per buck for every dollar spent by an employer. NVIDIA, not even a top-tier tech employer, tops up HSAs and throws $6,500 (maximum legally allowed) into your 401(k) regardless of contribution. FAANG and even dinosaurs like GM and FedEx allow the Mega Backdoor Roth. We have to basically at a Wachtell & co. just to get a lousy 401(k) match.

If you're at a top firm, take note. This is how you attract high quality candidates without changing the whole compensation landscape.

We should really be taking a name and shame approach to this.
I agree. This is the one thing that I wish I knew about when I were picking firms at OCI. If I were choosing between, say, Latham and K&E and was otherwise in a dead heat, it would be a no-brainer to choose the firm that allows MBDR contributions. Imagine knowing that only one of two equivalent firms allows for you to effectively triple your retirement contributions, but to do so in a way that not only allows for tax-free growth but also allows for you to pull your principal at any point without penalty. It's a slam dunk, and even just three or four years of MBDR contributions will add up to a couple hundred thousand dollars of taxes saved (i.e. free money) come retirement.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 3:32 pm

McDermott Will & Emery allows after-tax contributions and in-service distributions to Roth IRAs. :D

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sat Sep 12, 2020 8:12 pm

Saw on another thread that Clifford Chance allows it, but only up to 10k

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Lukky » Sun Sep 13, 2020 10:02 am

Anonymous User wrote:
Sat Sep 12, 2020 3:20 pm
Anonymous User wrote:
Sat Sep 12, 2020 2:48 pm
K&E does not. Honestly, I would be shocked if anything beyond a small minority of the V100 did. This is an area where law firms are woefully behind tech firms (besides the fact that we are just straight up falling behind in pay). The present value of 15% long-term capital gains tax savings on $37,500, which is what you'd be allowed in additional contributions after you top-up your traditional 401(k), compounding at 10% per year for 40 years is something like ~75k. Don't quote me on that. I'm not in finance for a reason, but it's a significant portion of value that firms could be allowing us to have without actually raising salaries but for the fact that biglaw firms are total dinosaurs in this regard.

For current law students, if you're picking between two interchangeable V100s, picking based on this actually makes more sense than context-less differences in Vault ranking or whatever little glimpse of culture that you can observe during a callback. If a V50 offered you 30k/yr more than a V20, you might reconsider that V20 offer. Wouldn't you? This is basically that. Post-offer and pre-acceptance both as a 1L (now 2Ls) and after your SA are the two times where you have incredible power. Ask about this. If I were lateralling and had a choice between roughly equal firms, this would be one of my top criteria.

Instead of demanding NYC to 200k, we should be asking for shit like this since it's cheaper for firms to provide and provides higher bang per buck for every dollar spent by an employer. NVIDIA, not even a top-tier tech employer, tops up HSAs and throws $6,500 (maximum legally allowed) into your 401(k) regardless of contribution. FAANG and even dinosaurs like GM and FedEx allow the Mega Backdoor Roth. We have to basically at a Wachtell & co. just to get a lousy 401(k) match.

If you're at a top firm, take note. This is how you attract high quality candidates without changing the whole compensation landscape.

We should really be taking a name and shame approach to this.
I agree. This is the one thing that I wish I knew about when I were picking firms at OCI. If I were choosing between, say, Latham and K&E and was otherwise in a dead heat, it would be a no-brainer to choose the firm that allows MBDR contributions. Imagine knowing that only one of two equivalent firms allows for you to effectively triple your retirement contributions, but to do so in a way that not only allows for tax-free growth but also allows for you to pull your principal at any point without penalty. It's a slam dunk, and even just three or four years of MBDR contributions will add up to a couple hundred thousand dollars of taxes saved (i.e. free money) come retirement.
I dunno. I wouldn't say it's a "no-brainer." At the end of the day, (someone correct me if my math is wrong) you're probably saving 15% of $37.5k. That's only $5.625k per year. Kirkland pays above market bonuses, which can be $10k+ (1.2x market rate) once you're a third year associate. And nobody would every say it's a "no-brainer" to take Kirkland because of their bonuses.

EDIT: Forgot that the calculation is more in favor of the MBDR because the bonuses are taxed. Still though, I think the overall point stands. Not sure people should be choosing firms to increase their overall compensation by a couple basis points.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sun Sep 13, 2020 12:49 pm

I was psyched to see my old firm's 401k plan offered after-tax contribution option. But I called the plan administrator and was told they do not allow in-plan transfer of after-tax to Roth 401k, and do not allow in-service distribution to Roth IRA. So that after-tax contribution option didn't really carry any value in the end.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sun Sep 13, 2020 12:52 pm

Lukky wrote:
Sun Sep 13, 2020 10:02 am
I dunno. I wouldn't say it's a "no-brainer." At the end of the day, (someone correct me if my math is wrong) you're probably saving 15% of $37.5k. That's only $5.625k per year. Kirkland pays above market bonuses, which can be $10k+ (1.2x market rate) once you're a third year associate. And nobody would every say it's a "no-brainer" to take Kirkland because of their bonuses.

EDIT: Forgot that the calculation is more in favor of the MBDR because the bonuses are taxed. Still though, I think the overall point stands. Not sure people should be choosing firms to increase their overall compensation by a couple basis points.
Lukky, I'm the OP of the longer post. Your math isn't wrong, but you're misunderstanding how the MBDR works. Usually, by the time you get to the MBDR, you've exhausted every way that you can possibly hide cash from the government's ability to tax it and thus have to resort to either a taxable brokerage account or MBDR (if you have an a MBDR).

In a taxable brokerage account, the government gets you going in and coming out. They tax you when you make the money via personal income tax. They tax your gains on the investment as long-term capital gains tax on the back end for 15%. In the MDBR, you still get hit with the personal income tax going in, but you avoid the 15% tax coming out. Your investments are allowed to grow tax-free.

If you are investing in purely indexed ETFs, the theory is that rain or shine, you're buying ETFs and never selling. There should, in theory, only be one realization event, which is when, in retirement, you sell shares as you need them to fund your needs.

Let's say you a buy a share of an ETF at a $37,500. The $37,500 has already been taxed as personal income tax when you receive it. That's why you need the after-tax contribution feature of the 401(k). That share never ever gets sold until you retire. If you work for 40 years and then retire, at which point you immediately starting cashing out your ETFs, your original share of that ETF grows for 40 years. Let's assume you bought an S&P 500-based ETF. Based on the track record of the S&P 500 from 1919-2019, it should've grown at about ~10% a year, which was what my original calculation is based on, but let's be conservative and call it 7% instead, which would closer to the growth of all stocks in the market. This would mathematically be represented as:

37500*(1+0.07)^40=$561,542

The 15% taxation would be presented as:

561542*0.15=$84,231

That $84,231 is the ultimate tax that you've avoided by doing an MDBR rather than a taxable savings account where the government would get you on the back-end. However, future dollars is worth less than present-day dollars in that it has less purchasing power. To account for that deflation in value, which is about 3% a year historically and reduce the value of that inflated future money to present-day dollars, the equation is:

84231/(1+0.03)^40=$25,281

So, by topping off your MDBR in 2020, you are, if everything operates as it has historically, banking the $25,281 worth of tax savings present-day tax savings. You can't spend that savings, but you can't spend your 401(k) savings either. Those savings don't even appear on your brokerage account as a number, but they will feel very, very real if you had to write a check to Uncle Sam for that number. It's $25,281 worth of present-day value, which, despite the fact that it doesn't feel that way, may as well just be a firm writing a tax-free check for that amount. Hence why I compared to basically just being compensation.

That same set of math done 10% returns leads to $78,044 in present-day dollar tax savings on the back end. Doing it again and assuming that one is not a K-JD and starts working at 27 with a retirement age of 65 gets us $64,499 in tax savings on the back end.

Of course, every subsequent year in which you use the MDBR, the savings reduce because there is less time to compound the growth of the investment, but the middling range of the savings should be somewhere in the $15k-30k present-day dollar range depending on your assumptions about when you start working, when you retire, and rate of growth. That's why I said in essence, it's the firm just paying you $30k extra per-year (after-tax).

To really put this into perspective, that $30k in let's call it "virtual" savings, grossed up to account for a effective income tax rate of a first-year associate in NYC biglaw, would be like a firm pay ~240k salary instead of $190k, which I suspect would change a lot of people's minds when it comes to choosing firms if they understood exactly how the math behind MDBRs work.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Lukky » Sun Sep 13, 2020 2:37 pm

Anonymous User wrote:
Sun Sep 13, 2020 12:52 pm
Lukky wrote:
Sun Sep 13, 2020 10:02 am
I dunno. I wouldn't say it's a "no-brainer." At the end of the day, (someone correct me if my math is wrong) you're probably saving 15% of $37.5k. That's only $5.625k per year. Kirkland pays above market bonuses, which can be $10k+ (1.2x market rate) once you're a third year associate. And nobody would every say it's a "no-brainer" to take Kirkland because of their bonuses.

EDIT: Forgot that the calculation is more in favor of the MBDR because the bonuses are taxed. Still though, I think the overall point stands. Not sure people should be choosing firms to increase their overall compensation by a couple basis points.
Lukky, I'm the OP of the longer post. Your math isn't wrong, but you're misunderstanding how the MBDR works. Usually, by the time you get to the MBDR, you've exhausted every way that you can possibly hide cash from the government's ability to tax it and thus have to resort to either a taxable brokerage account or MBDR (if you have an a MBDR).

In a taxable brokerage account, the government gets you going in and coming out. They tax you when you make the money via personal income tax. They tax your gains on the investment as long-term capital gains tax on the back end for 15%. In the MDBR, you still get hit with the personal income tax going in, but you avoid the 15% tax coming out. Your investments are allowed to grow tax-free.

If you are investing in purely indexed ETFs, the theory is that rain or shine, you're buying ETFs and never selling. There should, in theory, only be one realization event, which is when, in retirement, you sell shares as you need them to fund your needs.

Let's say you a buy a share of an ETF at a $37,500. The $37,500 has already been taxed as personal income tax when you receive it. That's why you need the after-tax contribution feature of the 401(k). That share never ever gets sold until you retire. If you work for 40 years and then retire, at which point you immediately starting cashing out your ETFs, your original share of that ETF grows for 40 years. Let's assume you bought an S&P 500-based ETF. Based on the track record of the S&P 500 from 1919-2019, it should've grown at about ~10% a year, which was what my original calculation is based on, but let's be conservative and call it 7% instead, which would closer to the growth of all stocks in the market. This would mathematically be represented as:

37500*(1+0.07)^40=$561,542

The 15% taxation would be presented as:

561542*0.15=$84,231

That $84,231 is the ultimate tax that you've avoided by doing an MDBR rather than a taxable savings account where the government would get you on the back-end. However, future dollars is worth less than present-day dollars in that it has less purchasing power. To account for that deflation in value, which is about 3% a year historically and reduce the value of that inflated future money to present-day dollars, the equation is:

84231/(1+0.03)^40=$25,281

So, by topping off your MDBR in 2020, you are, if everything operates as it has historically, banking the $25,281 worth of tax savings present-day tax savings. You can't spend that savings, but you can't spend your 401(k) savings either. Those savings don't even appear on your brokerage account as a number, but they will feel very, very real if you had to write a check to Uncle Sam for that number. It's $25,281 worth of present-day value, which, despite the fact that it doesn't feel that way, may as well just be a firm writing a tax-free check for that amount. Hence why I compared to basically just being compensation.

That same set of math done 10% returns leads to $78,044 in present-day dollar tax savings on the back end. Doing it again and assuming that one is not a K-JD and starts working at 27 with a retirement age of 65 gets us $64,499 in tax savings on the back end.

Of course, every subsequent year in which you use the MDBR, the savings reduce because there is less time to compound the growth of the investment, but the middling range of the savings should be somewhere in the $15k-30k present-day dollar range depending on your assumptions about when you start working, when you retire, and rate of growth. That's why I said in essence, it's the firm just paying you $30k extra per-year (after-tax).

To really put this into perspective, that $30k in let's call it "virtual" savings, grossed up to account for a effective income tax rate of a first-year associate in NYC biglaw, would be like a firm pay ~240k salary instead of $190k, which I suspect would change a lot of people's minds when it comes to choosing firms if they understood exactly how the math behind MDBRs work.
I mean, again, this is a little disingenuous. You're effectively trying to make the $5.625k look good by showing the powerful effects of compounding. Being taxed 15% up front or 15% down the line is exactly the same mathematically.

The point I was trying to get across is that the overall value of this is effectively being paid like $5.625k more. If someone doesn't have access to the MBDR but simply receives $5.625k more (post-tax), by investing that in the same kind of etf you mention above, the total value of this investment would equal the difference between the Latham associate that was able to take advantage of the MBDR as opposed to the Kirkland associate who has to put it in a taxable account and pay 15% capital gains when he takes the money out down the line.

EDIT: I guess my biggest problem with your post is that you assume a really healthy rate of return (7%) and then you use 3% for present-value discounting to make it seem like the present value is greater than $5.625k, which is just not sound reasoning. If that were the case, everyone should take out margin loans from Interactive Brokers at 3-4% and invest it into index funds. I get that the stock market has historically produced those kind of returns, but it certainly is not a risk-free rate.

Double EDIT: Sorry, just went back and read your original post. Yeah, it's just not accurate to say that the present value of the 15% tax savings on the $37.5k is 75k or whatever. Ask anyone who has a CFA or CPA and they would tell you that the present value of saving 15% on $37.5k is 15% of $37.5k, which is $5.625k.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by stoopkid13 » Sun Sep 13, 2020 2:58 pm

Yeah I don't understand why the discount rate is 7% when growing your MBDR, but 3% when figuring out the present day value.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sun Sep 13, 2020 3:27 pm

I’m not the KE poster, but I just want to point out that the 15% savings is savings on capital gain, i.e., on the investment returns that the 37.5k generates. You aren’t saving 15% of 37.5k. That money has already been taxed (Roth contributions are post-tax). The benefit is avoiding tax on the investment *profits* that the Roth investment generates. If you think a 7% return is too optimistic, go ahead and run the calculation at 5% or whatever you prefer. The point is not that you will get 7% “risk-free” every year. It’s that over the long term, an *average* return of 7% is an amount you can conservatively expect based on historical performance of the stock market. The 3% represents the expected rate of inflation, based on historical figures. 3% will almost certainly exceed the actual inflation rate for the coming decade, but I take it the KE poster was using an average historical inflation rate to be conservative.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by stoopkid13 » Sun Sep 13, 2020 3:36 pm

Anonymous User wrote:
Sun Sep 13, 2020 3:27 pm
I’m not the KE poster, but I just want to point out that the 15% savings is savings on capital gain, i.e., on the investment returns that the 37.5k generates. You aren’t saving 15% of 37.5k. That money has already been taxed (Roth contributions are post-tax). The benefit is avoiding tax on the investment *profits* that the Roth investment generates. If you think a 7% return is too optimistic, go ahead and run the calculation at 5% or whatever you prefer. The point is not that you will get 7% “risk-free” every year. It’s that over the long term, an *average* return of 7% is an amount you can conservatively expect based on historical performance of the stock market. The 3% represents the expected rate of inflation, based on historical figures. 3% will almost certainly exceed the actual inflation rate for the coming decade, but I take it the KE poster was using an average historical inflation rate to be conservative.
Ok, but why is the discount rate in one situation stock market returns, and in another situation the inflation rate? If I have $100 today, I can get a 7% return next year. Fine. But if I have an option to get $107 next year, its present value is suddenly $103 because there's 3% inflation?

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Sun Sep 13, 2020 3:42 pm

Lukky wrote:
Sun Sep 13, 2020 2:37 pm
Sorry, just went back and read your original post. Yeah, it's just not accurate to say that the present value of the 15% tax savings on the $37.5k is 75k or whatever. Ask anyone who has a CFA or CPA and they would tell you that the present value of saving 15% on $37.5k is 15% of $37.5k, which is $5.625k.
You're right. I went wrong somewhere in my thinking. I don't know where. This is why I have either a CFA nor a CPA, which I guess was covered my original post on not quoting me. Nonetheless, I think $5,625 is still a decision-changing amount of money between roughly comparable firms.

Admin, please delete my embarrassing math. I don't want anyone else to be mislead.

stoopkid13 wrote:
Sun Sep 13, 2020 3:36 pm
Ok, but why is the discount rate in one situation stock market returns, and in another situation the inflation rate? If I have $100 today, I can get a 7% return next year. Fine. But if I have an option to get $107 next year, its present value is suddenly $103 because there's 3% inflation?
stoopkid13 wrote:
Sun Sep 13, 2020 2:58 pm
Yeah I don't understand why the discount rate is 7% when growing your MBDR, but 3% when figuring out the present day value.
I'm not sure if this applies to your point as well, but I'm conceding the point. I'll just reiterate simply that it's money left on the table that firms could offer us without actually raising salaries.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by showusyourtorts » Sun Sep 13, 2020 8:45 pm

Lukky wrote:
Sun Sep 13, 2020 2:37 pm
I mean, again, this is a little disingenuous. You're effectively trying to make the $5.625k look good by showing the powerful effects of compounding. Being taxed 15% up front or 15% down the line is exactly the same mathematically.

The point I was trying to get across is that the overall value of this is effectively being paid like $5.625k more. If someone doesn't have access to the MBDR but simply receives $5.625k more (post-tax), by investing that in the same kind of etf you mention above, the total value of this investment would equal the difference between the Latham associate that was able to take advantage of the MBDR as opposed to the Kirkland associate who has to put it in a taxable account and pay 15% capital gains when he takes the money out down the line.

EDIT: I guess my biggest problem with your post is that you assume a really healthy rate of return (7%) and then you use 3% for present-value discounting to make it seem like the present value is greater than $5.625k, which is just not sound reasoning. If that were the case, everyone should take out margin loans from Interactive Brokers at 3-4% and invest it into index funds. I get that the stock market has historically produced those kind of returns, but it certainly is not a risk-free rate.

Double EDIT: Sorry, just went back and read your original post. Yeah, it's just not accurate to say that the present value of the 15% tax savings on the $37.5k is 75k or whatever. Ask anyone who has a CFA or CPA and they would tell you that the present value of saving 15% on $37.5k is 15% of $37.5k, which is $5.625k.
I'm the original "no-brainer" poster checking in for the first time since then. I don't think we disagree on any of the key points here.

I do think that the annual $5,625 pre-tax (or ~10k post-tax) salary bump slightly underestimates the value of the ability to make MBDR contributions. That's because it does not take into account the value in having marginal ability to make investments in a tax-advantaged spaced. It's only a small refinement, but just wanted to share my thinking.

Say that I'm a Kirkland associate that makes 190k and wants to invest my extra cash for retirement. After paying living expenses and maxing out my pre-tax 401(k), IRA and HSA, let's posit that I have exactly $37,500 in my checking account that I'd like to invest. Assuming a 40-year retirement horizon and 7% returns, I will have a balance by of $561,542 by Year 40; after paying 15% capital gains taxes, I'll have $477,311 in my checking account.

Now let's say that I'm the same individual, except that I'm instead making my $190k at Latham and therefore have the ability to make MBDR contributions with my excess $37,500. By Year 40, I'll be able to withdraw my entire $561,542 balance into my checking account without paying any taxes on the growth. That's an additional $84,231 cash in my pocket at Year 40 as compared to the Kirkland associate.

Finally, let's say that I'm the same individual, except that this time I'm making $200k at Latham and do not have the ability to make MBDR contributions with my excess cash, which is now $43,125 (i.e. the same $37,500 + my new $5,625 pay bump). I will have a balance of $645,773 by Year 40, which after taxes will leave me with $548,907 in my checking account. That's only an additional $71,596 at Year 40 as compared to the Kirkland associate. In other words, that salary bump undervalues the ability to make MBDR contributions.

I think that the most accurate figure is $6,617 post-tax (or ~13k pre-tax). [My calculation: I solved for the amount that you would need to invest in a taxable account in Y0 to end up with that same post-tax $561,542 by Year 40, which spits out a contribution of $44,118, which is $6617 more than $37,500.]

In NYC, this would be the difference between a $190k salary and a $203k salary. To refine, it would be a "no brainer" to choose between two otherwise comparable firms with the above pay disparity. This difference is especially striking when viewed in terms of future value (as, I agree, any distinction based on present value would be). Still, it's worth noting that under these pretty conservative assumptions, and assuming that you're otherwise saving for retirement and changing literally nothing in your spending habits, then this pay disparity is worth a full post-tax $84k of extra cash in Year 40. Also worth noting is that in the above example, we're assuming you only make the contribution for a single year. If you were to alternatively utilize the MBDR for even only five years, when compared against investing in taxable accounts, you'd generate a bit less than $420k of additional post-tax cash by Year 40. Of course, YMMV if tax rates and investment returns and horizons change, but in no case will you make *less* than you do with the MBDR.

There are some other bonus perks associated with the MBDR planning that are less easily quantified. For example, since these amounts are entirely post-tax, they will therefore will not drive up your marginal tax rate when you liquidate your funds in retirement (which will be relevant if you have any other income). Having a lower MAGI will also be beneficial for IRMAA and ACA purposes (or other similar income-based social welfare benefits, which will presumably exist in one form or another). There's also better creditor protection if your money is held within retirement accounts.

In exchange for these benefits, you only lose the ability to withdraw your interest until retirement age; you can withdraw your principal at any point without penalty or tax if you do decide that you want to opt out of the MBDR zone and instead utilize your principal to, say, make a down payment (which is why a lot of folks refer to the MBDR as a secondary emergency fund).

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showusyourtorts

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by showusyourtorts » Sun Sep 13, 2020 9:32 pm

Anonymous User wrote:
Sun Sep 13, 2020 3:42 pm
I'll just reiterate simply that it's money left on the table that firms could offer us without actually raising salaries.
+1.

In a perfect world, kids that are choosing between firms at second look visits are able to both (1) know and understand the benefits of the MBDR and (2) identify which firms support MBDR contributions. To the extent that the above conditions actually play out -- and I don't think it's disingenuous to posit that firms could successfully attract students by affirmatively discussing their differentiated benefits package -- then firms that don't pursue a 401(k) plan that facilitates MBDR contributions are letting qualified talent walk out the door.

I wonder what the cost difference (including any administrative costs on the firm's end) is between a 401(k) plan that supports MBDR contributions. It'd be interesting to know how many firms' decision makers are unaware of the benefits associated with the MBDR versus how many firms' decision makers are making this choice with full knowledge and understanding of the above, but decide to nix the MBDR 401(k) plan for either purely cost-center reasons or because they don't believe it'll sufficiently attract candidates they would otherwise lose.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by rshackleford123 » Mon Sep 14, 2020 7:36 am

Not surprised on the survey results here. I've tried pushing this with my firm and it generally has been met with disinterest (even though a lot of 401(k) providers automatically do in-plan Roth conversions for you on a payroll basis now.

I think the biggest issue likely comes down to discrimination testing concerns for the 401(k) plan. Everyone who participates in the after-tax/conversion strategy likely is highly compensated and unless the firm provides sufficient contributions to the non-highly compensated employees (e.g., matching contributions) the plan likely will fail testing, which would require those after-tax contributions be distributed. That's why the firms that allow these contributions may impose a cap.

Even failing the discrimination testing only would require distribution of those contributions, so the real reason I can see a firm against this is the administrative hassle associated with running/correcting discrimination testing.

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UnfrozenCaveman

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by UnfrozenCaveman » Mon Sep 14, 2020 8:55 am

Not an expert on 401k design taxation, but pretty sure there's more considerations than just changing the plan to allow MBDR.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Lukky » Mon Sep 14, 2020 1:22 pm

rshackleford123 wrote:
Mon Sep 14, 2020 7:36 am
Not surprised on the survey results here. I've tried pushing this with my firm and it generally has been met with disinterest (even though a lot of 401(k) providers automatically do in-plan Roth conversions for you on a payroll basis now.

I think the biggest issue likely comes down to discrimination testing concerns for the 401(k) plan. Everyone who participates in the after-tax/conversion strategy likely is highly compensated and unless the firm provides sufficient contributions to the non-highly compensated employees (e.g., matching contributions) the plan likely will fail testing, which would require those after-tax contributions be distributed. That's why the firms that allow these contributions may impose a cap.

Even failing the discrimination testing only would require distribution of those contributions, so the real reason I can see a firm against this is the administrative hassle associated with running/correcting discrimination testing.
That makes sense. Additionally, firms are probably worried about the fact that after-tax contributions are generally a pretty stupid idea if you haven't maxed out your other tax-advantaged spaces. People might mistakenly make these after-tax contributions instead of putting the money into a roth or traditional 401k, and the firm probably doesn't want to spend the resources educating their workforce or having to answer a bunch of questions about 401k planning.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Lukky » Mon Sep 14, 2020 1:42 pm

showusyourtorts wrote:
Sun Sep 13, 2020 8:45 pm
Lukky wrote:
Sun Sep 13, 2020 2:37 pm
I mean, again, this is a little disingenuous. You're effectively trying to make the $5.625k look good by showing the powerful effects of compounding. Being taxed 15% up front or 15% down the line is exactly the same mathematically.

The point I was trying to get across is that the overall value of this is effectively being paid like $5.625k more. If someone doesn't have access to the MBDR but simply receives $5.625k more (post-tax), by investing that in the same kind of etf you mention above, the total value of this investment would equal the difference between the Latham associate that was able to take advantage of the MBDR as opposed to the Kirkland associate who has to put it in a taxable account and pay 15% capital gains when he takes the money out down the line.

EDIT: I guess my biggest problem with your post is that you assume a really healthy rate of return (7%) and then you use 3% for present-value discounting to make it seem like the present value is greater than $5.625k, which is just not sound reasoning. If that were the case, everyone should take out margin loans from Interactive Brokers at 3-4% and invest it into index funds. I get that the stock market has historically produced those kind of returns, but it certainly is not a risk-free rate.

Double EDIT: Sorry, just went back and read your original post. Yeah, it's just not accurate to say that the present value of the 15% tax savings on the $37.5k is 75k or whatever. Ask anyone who has a CFA or CPA and they would tell you that the present value of saving 15% on $37.5k is 15% of $37.5k, which is $5.625k.
I'm the original "no-brainer" poster checking in for the first time since then. I don't think we disagree on any of the key points here.

I do think that the annual $5,625 pre-tax (or ~10k post-tax) salary bump slightly underestimates the value of the ability to make MBDR contributions. That's because it does not take into account the value in having marginal ability to make investments in a tax-advantaged spaced. It's only a small refinement, but just wanted to share my thinking.

Say that I'm a Kirkland associate that makes 190k and wants to invest my extra cash for retirement. After paying living expenses and maxing out my pre-tax 401(k), IRA and HSA, let's posit that I have exactly $37,500 in my checking account that I'd like to invest. Assuming a 40-year retirement horizon and 7% returns, I will have a balance by of $561,542 by Year 40; after paying 15% capital gains taxes, I'll have $477,311 in my checking account.

Now let's say that I'm the same individual, except that I'm instead making my $190k at Latham and therefore have the ability to make MBDR contributions with my excess $37,500. By Year 40, I'll be able to withdraw my entire $561,542 balance into my checking account without paying any taxes on the growth. That's an additional $84,231 cash in my pocket at Year 40 as compared to the Kirkland associate.

Finally, let's say that I'm the same individual, except that this time I'm making $200k at Latham and do not have the ability to make MBDR contributions with my excess cash, which is now $43,125 (i.e. the same $37,500 + my new $5,625 pay bump). I will have a balance of $645,773 by Year 40, which after taxes will leave me with $548,907 in my checking account. That's only an additional $71,596 at Year 40 as compared to the Kirkland associate. In other words, that salary bump undervalues the ability to make MBDR contributions.

I think that the most accurate figure is $6,617 post-tax (or ~13k pre-tax). [My calculation: I solved for the amount that you would need to invest in a taxable account in Y0 to end up with that same post-tax $561,542 by Year 40, which spits out a contribution of $44,118, which is $6617 more than $37,500.]

In NYC, this would be the difference between a $190k salary and a $203k salary. To refine, it would be a "no brainer" to choose between two otherwise comparable firms with the above pay disparity. This difference is especially striking when viewed in terms of future value (as, I agree, any distinction based on present value would be). Still, it's worth noting that under these pretty conservative assumptions, and assuming that you're otherwise saving for retirement and changing literally nothing in your spending habits, then this pay disparity is worth a full post-tax $84k of extra cash in Year 40. Also worth noting is that in the above example, we're assuming you only make the contribution for a single year. If you were to alternatively utilize the MBDR for even only five years, when compared against investing in taxable accounts, you'd generate a bit less than $420k of additional post-tax cash by Year 40. Of course, YMMV if tax rates and investment returns and horizons change, but in no case will you make *less* than you do with the MBDR.

There are some other bonus perks associated with the MBDR planning that are less easily quantified. For example, since these amounts are entirely post-tax, they will therefore will not drive up your marginal tax rate when you liquidate your funds in retirement (which will be relevant if you have any other income). Having a lower MAGI will also be beneficial for IRMAA and ACA purposes (or other similar income-based social welfare benefits, which will presumably exist in one form or another). There's also better creditor protection if your money is held within retirement accounts.

In exchange for these benefits, you only lose the ability to withdraw your interest until retirement age; you can withdraw your principal at any point without penalty or tax if you do decide that you want to opt out of the MBDR zone and instead utilize your principal to, say, make a down payment (which is why a lot of folks refer to the MBDR as a secondary emergency fund).
Yeah, you're right. My math was off a little bit (percentages don't work the same in both directions!). Wasn't really thinking intensely about it, but the correct calculation is: $37.5 / (.85) - $37.5

I'll stand by my broader point though that $6.6k shouldn't be a huge factor in a person choosing their firms. Sure, maybe if everything else is exactly equal, you'll take the money, but that's rarely the case. As mentioned above, when comparing Kirkland / Latham, Kirkland offers above-market bonuses. Maybe not so meaningful the first two years, but it really starts adding up from year 3+ (speculating based on the fact I've heard it's somewhere around 1.25 market bonus). Of course, this also should not be a huge factor in going with Kirkland. I'm just pointing out that, similar to how people don't all go to Kirkland because it offers slightly higher bonuses, this shouldn't really be as significant as people here are making it out to be.

EDIT: I've somewhat changed my mind. A lot of people chose Kirkland because of their bonuses. Makes sense that a lot of people might go with Latham because of MBDR if they understood it.

I suspect the reason that Latham doesn't advertise this is because it's relatively complicated and not everyone is super into personal finance. The numbers / complexity is probably more likely to scare law students, and debt-ridden law students likely don't have the ability to max out all of their tax-advantaged space anyways.

That being said, +1 to Latham. I promise to think of them a little more fondly than I did before.

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by showusyourtorts » Mon Sep 14, 2020 3:24 pm

Lukky wrote:
Mon Sep 14, 2020 1:42 pm
showusyourtorts wrote:
Sun Sep 13, 2020 8:45 pm
I think that the most accurate figure is $6,617 post-tax (or ~13k pre-tax). [My calculation: I solved for the amount that you would need to invest in a taxable account in Y0 to end up with that same post-tax $561,542 by Year 40, which spits out a contribution of $44,118, which is $6617 more than $37,500.]

Yeah, you're right. My math was off a little bit (percentages don't work the same in both directions!). Wasn't really thinking intensely about it, but the correct calculation is: $37.5 / (.85) - $37.5

I'll stand by my broader point though that $6.6k shouldn't be a huge factor in a person choosing their firms. Sure, maybe if everything else is exactly equal, you'll take the money, but that's rarely the case. As mentioned above, when comparing Kirkland / Latham, Kirkland offers above-market bonuses. Maybe not so meaningful the first two years, but it really starts adding up from year 3+ (speculating based on the fact I've heard it's somewhere around 1.25 market bonus). Of course, this also should not be a huge factor in going with Kirkland. I'm just pointing out that, similar to how people don't all go to Kirkland because it offers slightly higher bonuses, this shouldn't really be as significant as people here are making it out to be.

EDIT: I've somewhat changed my mind. A lot of people chose Kirkland because of their bonuses. Makes sense that a lot of people might go with Latham because of MBDR if they understood it.

Oof. My calculator and I spent a solid ten minutes getting to that $6.6k without realizing you could just divide by .85 and subtract the difference. :lol:

Totally agree with the point that a slight salary bump at these amounts should not be a material factor when choosing among firms. Given the relatively high turnover and high salaries, any kind of fit or "in" that extends the healthy and happy longevity of a biglaw stay is probably well worth a ~13k pre-tax relative pay decrease. I guess my thinking is that that's not mutually exclusive with the fact that a lot of prospective associates don't end up feeling an "in" or "fit" with any employers and thus don't have much else to go by. It's definitely worth stressing that the ~13k pay bump should probably ONLY be a consideration in that scenario.

Lukky wrote:
Mon Sep 14, 2020 1:42 pm
I suspect the reason that Latham doesn't advertise this is because it's relatively complicated and not everyone is super into personal finance. The numbers / complexity is probably more likely to scare law students, and debt-ridden law students likely don't have the ability to max out all of their tax-advantaged space anyways.

Interestingly, I'm in the position where I'm a first year associate with a large debt load (about ~170k) and I *think* that I'm nonetheless planning to make good use of my MBDR option at my as-yet unnamed biglaw firm. If I do utilize the MBDR, I'll plan to hold my investments in my Roth IRA for the next couple of years at a very conservative amount (perhaps targeting one or two percent) so that I can feel confident that my money can truly be pulled at any point without being subject to the market. If I end up pulling the principal, then my only loss will be the difference between my targeted investment and my "guaranteed" loan rate, which is currently parked at 2.5% on a five-year plan. If I don't, then that money will grow tax-free in perpetuity, and I can start notching up how aggressively I invest the MBDR contributions, perhaps in tiers over the next couple of years as I get more comfortable with an actually lower principal balance. I ended up doing a ton of research to confirm that I'd always be able to withdraw my principal at my leisure without penalty or tax (which is not true for every person regarding every dollar in their Roth IRA, due to the Roth ordering rules), and as a result I feel pretty comfortable with the mental trick that any payment toward my MBDR = an effective payment off my student debt, should I decide to forego the tax-free growth at any point.

I think the paramount consideration in my circumstance (or really any debt-ridden junior associate's circumstance) would be to allow myself flexibility to "choose" to leave biglaw if desired. I suppose I just don't think the above method would sacrifice that flexibility. And of course, there is something to be said for the mental distinction between having no debt versus having debt but having available funds to pay that debt off. If you're the type of person -- and many people are -- that will feel limited by an outstanding $50k debt even where you have the liquidity over and above your e-fund to fully pay off that amount, then I obviously wouldn't recommend the above strategy, so YMMV.

I've been trying to interpret my dilemma as the classic "taxable investment account versus aggressive loan prepayment" decision, which has good points on both sides. Once the MBDR gets involved, though, for me it personally skewed pretty heavily toward the investment angle. I suppose another way I think about it is that it's a no-brainer for most folks with ample cash flow -- even those with pretty heavy debt -- to max out their other retirement accounts, including their non-deductible IRA. If that's true, then the same could arguably be said for the MBDR, especially so given the ability to temporarily hold conservatively and to withdraw principal as or when necessary.

/soapbox. (I'm trying to psych myself up on this so that I feel good about NOT prepaying debt. It's difficult.)

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Mon Sep 14, 2020 5:05 pm

Paul Hastings allows it, and semi-heavily suggests/pushes it. (I'm not actually sure if it's option 1 or 2 in poll though, not using it until student loans are lower).

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Re: Does your biglaw firm’s 401(k) plan allow for Mega Backdoor Roth contributions? [POLL]

Post by Anonymous User » Tue Sep 15, 2020 4:32 am

STB’s plan allows for a MBDR to a Roth IRA.

Seriously? What are you waiting for?

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