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
10
17%
After-tax contributions AND in-plan conversion to Roth 401(k)
5
8%
Only allows after-tax contributions
12
20%
Does not allow after-tax contributions
32
54%
 
Total votes: 59

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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 9:53 am

Anonymous User wrote:
Tue Sep 15, 2020 4:32 am
STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): ?
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO

Paul Hastings (v22): YES
Last edited by Anonymous User on Fri Sep 25, 2020 1:18 pm, edited 7 times in total.

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polareagle

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

Post by polareagle » Tue Sep 15, 2020 10:54 am

Anonymous User wrote:
Tue Sep 15, 2020 4:32 am
STB’s plan allows for a MBDR to a Roth IRA.
Wait, I'm confused by this. To be a "mega backdoor" Roth, it has to involve the 401(k) because you need the higher contribution limit (hence the "mega"). Anyone with income can contribute $6k to a Roth IRA using the regular backdoor. Do you mean that at STB you can contribute $19k or whatever to your 401(k) and then roll it over into a Roth IRA? (If so, great! You've got a mega backdoor Roth!)

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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 10:57 am

polareagle wrote:
Tue Sep 15, 2020 10:54 am
Anonymous User wrote:
Tue Sep 15, 2020 4:32 am

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

Wait, I'm confused by this. To be a "mega backdoor" Roth, it has to involve the 401(k) because you need the higher contribution limit (hence the "mega"). Anyone with income can contribute $6k to a Roth IRA using the regular backdoor. Do you mean that at STB you can contribute $19k or whatever to your 401(k) and then roll it over into a Roth IRA? (If so, great! You've got a mega backdoor Roth!)

I'm not the OP, but I believe OP is referring to the fact that STB will allow for (i) $19.5k to a traditional or Roth 401(k) and also (ii) an additional $37.5k of after-tax contributions to their 401(k), which can then be immediately rolled into a Roth IRA (i.e. "in-service distributions [from your 401(k)] to Roth IRA").

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polareagle

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

Post by polareagle » Tue Sep 15, 2020 11:04 am

Anonymous User wrote:
Tue Sep 15, 2020 10:57 am
polareagle wrote:
Tue Sep 15, 2020 10:54 am
Anonymous User wrote:
Tue Sep 15, 2020 4:32 am

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

Wait, I'm confused by this. To be a "mega backdoor" Roth, it has to involve the 401(k) because you need the higher contribution limit (hence the "mega"). Anyone with income can contribute $6k to a Roth IRA using the regular backdoor. Do you mean that at STB you can contribute $19k or whatever to your 401(k) and then roll it over into a Roth IRA? (If so, great! You've got a mega backdoor Roth!)

I'm not the OP, but I believe OP is referring to the fact that STB will allow for (i) $19.5k to a traditional or Roth 401(k) and also (ii) an additional $37.5k of after-tax contributions to their 401(k), which can then be immediately rolled into a Roth IRA (i.e. "in-service distributions [from your 401(k)] to Roth IRA").
Got it. To my understanding, that's the most traditional, bread and butter MBDR, but I guess saying to a Roth IRA isn't redundant because there's a Roth 401(k) version of this as well. Thanks!

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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 11:25 am

polareagle wrote:
Tue Sep 15, 2020 11:04 am
Anonymous User wrote:
Tue Sep 15, 2020 10:57 am
polareagle wrote:
Tue Sep 15, 2020 10:54 am
Anonymous User wrote:
Tue Sep 15, 2020 4:32 am

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

Wait, I'm confused by this. To be a "mega backdoor" Roth, it has to involve the 401(k) because you need the higher contribution limit (hence the "mega"). Anyone with income can contribute $6k to a Roth IRA using the regular backdoor. Do you mean that at STB you can contribute $19k or whatever to your 401(k) and then roll it over into a Roth IRA? (If so, great! You've got a mega backdoor Roth!)

I'm not the OP, but I believe OP is referring to the fact that STB will allow for (i) $19.5k to a traditional or Roth 401(k) and also (ii) an additional $37.5k of after-tax contributions to their 401(k), which can then be immediately rolled into a Roth IRA (i.e. "in-service distributions [from your 401(k)] to Roth IRA").

Got it. To my understanding, that's the most traditional, bread and butter MBDR, but I guess saying to a Roth IRA isn't redundant because there's a Roth 401(k) version of this as well. Thanks!

Yep! Agreed.

For the folks following at home, the bread and butter MBDR involves the ability to immediately go from your after-tax 401(k) --> Roth IRA. The keywords here are that your plan allows for after-tax contributions and in-service distributions to a Roth IRA. This will allow you to avoid any taxable growth within your after-tax 401(k) account because you can immediately shove your contributions into your Roth IRA, where they will grow tax-free and where the principal can generally be withdrawn without penalty. This is the gold standard.

However, some firms will allow after-tax contributions but allow for you to effectively facilitate the same planning by immediately going from your after-tax 401(k) --> Roth 401(k). In other words, there are types of plans that (i) do allow for after-tax contributions, (ii) do not allow in-service distributions to a Roth IRA, and (iii) alternatively do allow for an "in-plan conversion to a Roth 401(k)." Here, your money will grow tax-free once it's within the Roth 401(k), which is why this iteration of the MBDR also works. However, you won't be able to move this money from your Roth 401(k) to your Roth IRA until you leave the firm (or until the firm otherwise changes plans to allow for in-service distributions), so the drawback is that you will not be able to withdraw your principal without penalty until your money is actually in the Roth IRA. This distinction shouldn't matter if you're not planning on having to withdraw principal before you leave your firm.

Of course, if given the choice, your appetite for the above options may differ if your available investment options and expense ratios differ wildly between your 401(k) and your IRA, with the latter usually providing a greater variety of options with lower expense ratios.

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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 12:00 pm

Anonymous User wrote:
Tue Sep 15, 2020 11:25 am
Of course, if given the choice, your appetite for the above options may differ if your available investment options and expense ratios differ wildly between your 401(k) and your IRA, with the latter usually providing a greater variety of options with lower expense ratios.
This point is worth highlighting. With a Roth IRA, you can invest in virtually anything in the market. 401(k) plans vary, but by and large the options are materially worse (and certainly more limited) than what you’ll be able to get with the Roth IRA. So if you’re stuck in a plan that doesn’t allow in-service distributions to a Roth IRA, make sure to at least liberate that money into a Roth IRA as soon as you leave the firm.

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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 12:14 pm

Anonymous User wrote:
Tue Sep 15, 2020 12:00 pm
Anonymous User wrote:
Tue Sep 15, 2020 11:25 am
Of course, if given the choice, your appetite for the above options may differ if your available investment options and expense ratios differ wildly between your 401(k) and your IRA, with the latter usually providing a greater variety of options with lower expense ratios.
This point is worth highlighting. With a Roth IRA, you can invest in virtually anything in the market. 401(k) plans vary, but by and large the options are materially worse (and certainly more limited) than what you’ll be able to get with the Roth IRA. So if you’re stuck in a plan that doesn’t allow in-service distributions to a Roth IRA, make sure to at least liberate that money into a Roth IRA as soon as you leave the firm.
+1. Conversely, depending on how your plan is set up, an in-service distribution to a Roth IRA typically requires a manual procedure for each distribution (sometimes requiring calling in every paycheck, imposing a small fee per distribution or otherwise limiting distributions per year), whereas many in-plan conversions to a Roth 401(k) can be automated at each paycheck. If so, and if your investment options are pretty similar between the two, then it may make sense to temporarily park your money in the Roth 401(k).

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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 12:37 pm

I’m the STB OP and can confirm it’s after-tax non Roth contributions that can be rolled into a Roth IRA. As discussed above, this means you can do the usual $19.5k contributions to a traditional or Roth 401(k) and then do an additional $37.5k in after-tax non Roth contributions and roll to a Roth IRA (you may also be able to roll to the Roth 401(k) but not sure why you would given the Roth IRA gives greater flexibility in what you can do with your money (e.g., rental properties, alternative investments through YieldStreet or NextSeed type companies, etc.)).

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

Post by showusyourtorts » Tue Sep 15, 2020 1:14 pm

Anonymous User wrote:
Tue Sep 15, 2020 12:37 pm
I’m the STB OP and can confirm it’s after-tax non Roth contributions that can be rolled into a Roth IRA. As discussed above, this means you can do the usual $19.5k contributions to a traditional or Roth 401(k) and then do an additional $37.5k in after-tax non Roth contributions and roll to a Roth IRA (you may also be able to roll to the Roth 401(k) but not sure why you would given the Roth IRA gives greater flexibility in what you can do with your money (e.g., rental properties, alternative investments through YieldStreet or NextSeed type companies, etc.)).

There are a couple of situations that may cause the Roth 401(k) to be preferable. I'd imagine the most common driving factor would be where the IRA rollover process is somehow less than ideal (i.e. it requires manual involvement, is limited to a certain number of times per year [causing some necessary taxable growth] or is accompanied by a small fee per each rollover). Besides that, I know that you can take a loan from a Roth 401(k) (which you cannot do with a Roth IRA). I think that the Roth 401(k) is also generally regarded as offering better creditor protection, as it has ERISA protection (the gold standard) whereas IRA accounts are generally only protected in bankruptcy proceedings. In most cases, though, I'd imagine that the flexibility of investment options in the Roth IRA would make the decision pretty obvious.

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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 3:45 pm

Anonymous User wrote:
Tue Sep 15, 2020 9:53 am
Anonymous User wrote:
Tue Sep 15, 2020 4:32 am
STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): ?
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): ?
Paul Weiss (v10): ?
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO

Updated list.

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

Post by a male human » Tue Sep 15, 2020 5:29 pm

I'm so happy to see advanced personal finance being percolated to lawyers who can take the most advantage of it.

I work at a small firm that wants to be frugal (retirement accounts managed by Paychex). I asked Paychex about this some time ago, but they don't allow it. Only after-tax "Roth" 401k. I prefer to max out a regular 401k to lower my taxable income, plus I'm not sure if an after-tax 401k would allow for my SEP-IRA rollovers.

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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 7:18 pm

a male human wrote:
Tue Sep 15, 2020 5:29 pm
I'm so happy to see advanced personal finance being percolated to lawyers who can take the most advantage of it.

I work at a small firm that wants to be frugal (retirement accounts managed by Paychex). I asked Paychex about this some time ago, but they don't allow it. Only after-tax "Roth" 401k. I prefer to max out a regular 401k to lower my taxable income, plus I'm not sure if an after-tax 401k would allow for my SEP-IRA rollovers.
Original pollster here. I was pretty surprised to find that almost none of my biglaw friends -- including those that have a pretty strong understanding of personal finances -- were aware of the MBDR. Thus, borne out of procrastination and a desire to share and discuss, the thread was born. =)

Do you mean that your plan only allows for you to make either pre-tax 401(k) OR after-tax non-Roth 401(k) contributions? If so, I'm sorry for the missed opportunity! I'm not familiar with Paychex but if I'm understanding correctly, then I believe their set-up is different than the traditional biglaw MBDR set-up, including my own, which simultaneously supports three distinct types of contributions: pre-tax 401(k), Roth 401(k) and after-tax non-Roth 401(k). My plan allows me to designate how much to contribute to each of the above buckets each pay period. For example, I can set my contributions so that my next paycheck puts $1000 into my pre-tax 401(k) and another $2000 into my after-tax non-Roth 401(k). The first two buckets are limited to $19,500 annually and taken together, all three buckets cannot exceed $57,000. Thus, I end up doing the first $19,500 as pre-tax amounts so that I can max out my deductions, and following that I can add up to an additional $37,500 as after-tax non-Roth amounts.

I'm not familiar with the SEP-IRA rules.. perhaps that's next on my to-learn list. :D

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

Post by a male human » Tue Sep 15, 2020 8:35 pm

Anonymous User wrote:
Tue Sep 15, 2020 7:18 pm
a male human wrote:
Tue Sep 15, 2020 5:29 pm
I'm so happy to see advanced personal finance being percolated to lawyers who can take the most advantage of it.

I work at a small firm that wants to be frugal (retirement accounts managed by Paychex). I asked Paychex about this some time ago, but they don't allow it. Only after-tax "Roth" 401k. I prefer to max out a regular 401k to lower my taxable income, plus I'm not sure if an after-tax 401k would allow for my SEP-IRA rollovers.
Original pollster here. I was pretty surprised to find that almost none of my biglaw friends -- including those that have a pretty strong understanding of personal finances -- were aware of the MBDR. Thus, borne out of procrastination and a desire to share and discuss, the thread was born. =)

Do you mean that your plan only allows for you to make either pre-tax 401(k) OR after-tax non-Roth 401(k) contributions? If so, I'm sorry for the missed opportunity! I'm not familiar with Paychex but if I'm understanding correctly, then I believe their set-up is different than the traditional biglaw MBDR set-up, including my own, which simultaneously supports three distinct types of contributions: pre-tax 401(k), Roth 401(k) and after-tax non-Roth 401(k). My plan allows me to designate how much to contribute to each of the above buckets each pay period. For example, I can set my contributions so that my next paycheck puts $1000 into my pre-tax 401(k) and another $2000 into my after-tax non-Roth 401(k). The first two buckets are limited to $19,500 annually and taken together, all three buckets cannot exceed $57,000. Thus, I end up doing the first $19,500 as pre-tax amounts so that I can max out my deductions, and following that I can add up to an additional $37,500 as after-tax non-Roth amounts.

I'm not familiar with the SEP-IRA rules.. perhaps that's next on my to-learn list. :D

I believe it's either pre-tax or after-tax Roth 401(k)... I could double check whether the latter is Roth or not, but I didn't want to fund it with after-tax money.

SEP-IRA is typically for those with side (non-W2) income, and for purposes of doing a clean backdoor Roth, I need to get rid of all (pre-tax) IRA funds. That's why I roll it over to the 401(k) so that I have $0 in IRAs. Kind of a hassle to coordinate though :)

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

Post by Anonymous User » Wed Sep 16, 2020 10:25 am

Paul Weiss permits it.

You can make post-tax contributions to a 401K up to the statutory limit. You are permitted 2 in-service withdrawals per year. The post-tax contributions can be rolled over to a Roth IRA, and any earnings on those contributions must be rolled over as well to an IRA.

Also, companies can’t just flip a switch and change their plans to permit MBDR. There are actually some rules you need to comply with, which require some monitoring. Too lazy to google it for you all but I’ve looked it up before.

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

Post by Anonymous User » Wed Sep 16, 2020 2:55 pm

Anonymous User wrote:
Wed Sep 16, 2020 10:25 am
Paul Weiss permits it.

You can make post-tax contributions to a 401K up to the statutory limit. You are permitted 2 in-service withdrawals per year. The post-tax contributions can be rolled over to a Roth IRA, and any earnings on those contributions must be rolled over as well to an IRA.

Also, companies can’t just flip a switch and change their plans to permit MBDR. There are actually some rules you need to comply with, which require some monitoring. Too lazy to google it for you all but I’ve looked it up before.
Thanks for sharing. I've updated that list.

They'll still let you put the growth in a traditional IRA, right? I'd imagine that's more relevant if you can only roll it over twice a year, too.

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

Post by Anonymous User » Wed Sep 16, 2020 8:46 pm

Anonymous User wrote:
Wed Sep 16, 2020 2:55 pm
Anonymous User wrote:
Wed Sep 16, 2020 10:25 am
Paul Weiss permits it.

You can make post-tax contributions to a 401K up to the statutory limit. You are permitted 2 in-service withdrawals per year. The post-tax contributions can be rolled over to a Roth IRA, and any earnings on those contributions must be rolled over as well to an IRA.

Also, companies can’t just flip a switch and change their plans to permit MBDR. There are actually some rules you need to comply with, which require some monitoring. Too lazy to google it for you all but I’ve looked it up before.
Thanks for sharing. I've updated that list.

They'll still let you put the growth in a traditional IRA, right? I'd imagine that's more relevant if you can only roll it over twice a year, too.
Growth can go to a traditional IRA. When I’ve done this over the past few years, I roll the growth back to the 401k plan, so I don’t get dinged with the pro rata rule on my backdoor roth.

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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 21, 2020 4:56 pm

Anonymous User wrote:
Wed Sep 16, 2020 8:46 pm
Anonymous User wrote:
Wed Sep 16, 2020 2:55 pm
Anonymous User wrote:
Wed Sep 16, 2020 10:25 am
Paul Weiss permits it.

You can make post-tax contributions to a 401K up to the statutory limit. You are permitted 2 in-service withdrawals per year. The post-tax contributions can be rolled over to a Roth IRA, and any earnings on those contributions must be rolled over as well to an IRA.

Also, companies can’t just flip a switch and change their plans to permit MBDR. There are actually some rules you need to comply with, which require some monitoring. Too lazy to google it for you all but I’ve looked it up before.
Thanks for sharing. I've updated that list.

They'll still let you put the growth in a traditional IRA, right? I'd imagine that's more relevant if you can only roll it over twice a year, too.
Growth can go to a traditional IRA. When I’ve done this over the past few years, I roll the growth back to the 401k plan, so I don’t get dinged with the pro rata rule on my backdoor roth.
That makes sense. I wonder whether any of these plans don't allow for associates to roll amounts back into their 401k plans. If so, and if they don't plan to utilize the full amount of both the normal backdoor and the mega backdoor (but plan to do more than the normal $6k), then I suppose it would make sense to run all amounts through the mega backdoor to avoid any pro rata issues.

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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 22, 2020 9:53 am

Ropes does not permits a mega back door roth. You cannot make non-roth after-tax contributions to the 401k.

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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 22, 2020 6:13 pm

Thanks for sharing. I've updated the list above for reference (and expanded a bit past the v10).

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

Post by Anonymous User » Thu Sep 24, 2020 4:03 pm

Gibson Dunn does not allow 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 » Fri Sep 25, 2020 12:44 pm

Anonymous User wrote:
Thu Sep 24, 2020 4:03 pm
Gibson Dunn does not allow this.
Thanks for sharing. I've updated.

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

Post by Anonymous User » Fri Sep 25, 2020 1:12 pm

White & Case does not permit a mega back door roth. You cannot make non-roth after-tax contributions to the 401k.

They have the option to contribute to Roth 401(k), but only up to cap of $19,500.

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

Post by Anonymous User » Fri Sep 25, 2020 1:17 pm

Anonymous User wrote:
Tue Sep 15, 2020 9:53 am
Anonymous User wrote:
Tue Sep 15, 2020 4:32 am
STB’s plan allows for a MBDR to a Roth IRA.

Thanks for sharing. It would be interesting to get a v10 [edit: a bit higher, because why not] rundown going, if anyone else can chime in:

Cravath (v1): ?
Skadden (v2): YES, to Roth IRA
Wachtell (v3): ?
SullCrom (v4): ?
Latham (v5): YES, to Roth 401(k)
Kirkland (v6): NO
Davis Polk (v7): ?
Simpson (v8): YES, to Roth IRA
Gibson Dunn (v9): NO
Paul Weiss (v10): YES, to Roth IRA
Sidley (v11): NO
Cleary (v14): NO
Jones Day (v16): NO
White & Case (v17): NO
Ropes (v19): NO

Paul Hastings (v22): YES
Nice. Thanks for sharing. Updated list above.

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