Many of you may be familiar with the Aramco Savings Plan, which is a key retirement benefit offered through Aramco. But did you know that the plan offers after-tax contributions? And did you know it’s possible to convert those after-tax contributions to Roth? This maneuver is known as mega backdoor Roth, but before we discuss exactly what that entails, let’s review some key attributes of the Aramco Savings Plan.
What is the Aramco Savings Plan?
The Aramco Savings Plan is a qualified employer sponsored retirement plan available to employees as a benefit through Aramco. Aramco and its employees can make contributions to the plan to save towards retirement on a tax advantaged basis. The Aramco Savings Plan is a known as a defined contribution plan, with similar attributes to a 401(k) Plan.
How Does the Aramco Savings Plan Work: Pre-Tax and Roth Contributions
Employees can contribute to the Aramco Savings Plan on a pre-tax or Roth basis. Pre-tax contributions are not subject to income taxes and grow tax deferred, and taxes are assessed when funds are withdrawn. Additionally, the IRS mandates that withdrawals of pre-tax funds must commence as required minimum distributions (RMDs) by age 73, or by age 75 for those born 1960 or later. Roth contributions are subject to income taxes, and assuming certain stipulations are met, grow tax free and have no RMDs. The IRS sets a deferral limit on how much you can contribute to the Plan annually on a combined pre-tax and Roth basis. In 2023, this limit is $22,500 for participants under age 50, and $30,000 for participants turning age 50 or older during the calendar year.
How Does the Aramco Savings Plan Work: Aramco’s Contribution
The Aramco Savings Plan offers a 9% employer match. This means that Aramco will make a matching contribution up to a maximum of 9% of base compensation, being your base salary plus ex-pat premium. For example, if your base compensation is $100,000 and you contribute 9%, or $9,000, to the Aramco Savings Plan throughout the year, Aramco will contribute a matching contribution of $9,000 to your account. The matching contribution is currently made on a pre-tax basis.
How Does the Aramco Savings Plan Work: After-Tax Savings
The Aramco Savings Plan also offers an after-tax savings option, which allows employees to save above the previously described pre-tax and Roth deferral limit. With that feature, employees can potentially contribute to the plan up the IRS defined contribution limit. In 2023, this limit is a combined $66,000 for participants under age 50, and $73,500 for participants turning age 50 or older during the calendar year. After-tax contributions may seem like they’re the same as Roth, but there are key distinctions. Roth and after-tax contributions, by definition, are both made after-tax. But while Roth contributions generally grow tax free, the earnings on after-tax contributions grow tax deferred (like pre-tax contributions) and will be subject to taxes when withdrawn. Also, unlike Roth, after-tax contributions are subject to RMD’s.
In Plan Roth Conversions and Mega Backdoor Roth
Another feature of the Aramco Savings Plan is in-plan Roth conversions. This allows an employee to convert a portion of their pre-tax or after-tax contributions to Roth. When converting pre-tax funds to Roth, the amount converted is subject to taxes in the year of the conversion. However, when converting after-tax funds to Roth, only the earnings portion of the conversion is subject to taxes. As such, if after-tax contributions are converted to Roth shortly or immediately after the contribution is made, there may be little to no earnings. Thus, in that scenario there would be little to no taxes due on the conversion, and going forward the after-tax funds are held in Roth.
Mega Backdoor Roth in Action
Let’s review how this could look in practice. Let’s imagine an Aramco employee earning $200,000 in base compensation. The employee, age 45, wants to maximize their contributions to the Aramco Savings Plan and implements the following strategy in 2023:
- Pre-tax contributions: 11%, or $22,000.
- Aramco matching contributions: 9%, or $18,000.
- Mega backdoor Roth: 13%, or $26,000, in contributions to the after-tax option, which the employee immediately converts to Roth via in-plan Roth conversions.
This employee will save the combined IRS maximum limit of $66,000 to the Aramco Savings Plan in 2023, which includes $26,000 in Mega backdoor Roth. Not only were the after-tax conversions done immediately and subject to little or no taxes at the time of the conversion, but they’re now held in the Roth portion of the plan and can potentially grow tax free.
Other Considerations
There are a few additional considerations with mega backdoor Roth. If you’ve made after-tax contributions to the Aramco Savings Plan, have not done an in-plan conversion, and have substantial earnings on your after-tax funds, you will still have an opportunity to move a portion of your after-tax savings to Roth. When you leave Aramco, you can roll over the contributions portion of your after-tax money to a Roth IRA and roll over the after-tax earnings portion to a traditional IRA. In either case, the rollover itself would be a nontaxable event.
Further, after retirement you could evaluate Roth conversions. A Roth conversion is the process of moving funds from a traditional IRA to a Roth IRA and although the amount of the conversion is taxed in the year it is made, the funds converted to Roth generally grow tax free. From a broad perspective, this strategy could be sensible for an individual who may be in a relatively low tax bracket before starting RMDs at age 73 or 75.
Another important consideration is that excess annual contributions to the Aramco Savings Plan above the maximum IRS limit (in 2023, a combined $66,000 for participants under age 50, and $73,500 for participants turning age 50 or older during the calendar year), would transfer to the Aramco supplemental savings plan. Although the supplemental savings plan grows tax deferred, the funds must be liquidated when leaving Aramco and taxed to the plan participant at that time.
Finally, when reviewing any of these considerations, it’s a good idea to seek help and avoid costly pitfalls. Everyone’s situation is different, and we recommend that you consider working with a qualified advisor to evaluate your personal financial picture and your goals.
If you’d like to learn more about this strategy, please email aramco@creativeplanning.com.
For more information about Creative Planning, please visit our website. You may view our disclosures here.