A Quick Guide to Maximizing Your Amazon 401(k)
No matter where you work, it’s crucial to have a plan in place for when you’re not working–that is, how you’ll save for retirement. A significant part of this strategy for many people is their employer retirement plan. Some of the world’s biggest employers, including Amazon, make it easy to save for retirement by offering 401(k)s.
Amazon’s 401(k) is fairly straightforward, and we’re here to help you understand the basics:
For every dollar Amazon employees contribute to their pre-tax or Roth 401(k), the company will provide $0.50 in matching contributions, capped at 4% of salary. Employees can contribute up to 4% of eligible pay and get up to a 2% match. Like most employers, Amazon will not match catch-up contributions if you’re eligible and over age 50.
After three years of employment, Amazon employees are fully vested in matching contributions. This means if you leave the company before you complete 3 full years, your match will be forfeited. This clause is commonly missed! Lastly, according to Amazon, one year of vesting service is a calendar year where an employee has provided at least 1,000 hours of service.
Employees at Amazon can contribute anywhere from 1% to 90% of salary on a pre-tax, Roth, or after-tax basis. These contributions must fall under IRS limits. For 2022, this limit is $20,500 for pre-tax and/or Roth contributions (not including the possibility for people turning 50 or older this year to make up to $6,500 in additional catch-up contributions).
Your pre-tax contributions and Roth contributions are combined to reach the $20,500 limit. You can contribute to either or both, but you can’t go over $20,500 total in 2022. Your contributions will automatically stop once you reach this limit, so you don’t have to worry about going over. See below for additional after-tax contribution limits and “Mega Back-Door” Roth details.
Anyone working at Amazon who is at least 18 can join this plan as early as their first day of work.
But wait, there’s more! Read on to get the most out of your Amazon 401(k).
Take Advantage of Matched Funds
Almost every major tech company offers an employer match on their 401(k). While we generally recommend fully maxing out your 401(k) to the IRS limit each year, at minimum, a 4% contribution will get you the “free money” that’s available at Amazon.
Maximize Deferrals
Put simply, an elective-deferral contribution (or a “deferral” for short) is the direct contribution of funds included in an employee’s paycheck into a retirement plan. While you’ll need to follow the rules set by Amazon and the IRS when making deferrals, they can be a handy financial tool.
Aside from the deferral guidelines outlined above, you’ll need to take your financial situation into account when deciding how much to save. If you can afford to hit the limit on these contributions, it’s worth it (and we recommend it!).
Wondering how to solve for your max? Just take the annual IRS limit over your base salary.
Example: the max pre-tax and/or Roth contribution is $20,500 in 2022. Take that over your base salary of $160,000 to find:
$20,500 / $160,000 = 12.8%.
Setting your pre-tax and/or Roth contribution to 13% will max you out over 12 months.
What if you start half way through the year? You’ll need to take 6 months worth of salary and divide by the same annual limit:
$20,500 / $80,000 (6 months of salary) = 25.6% (round to 26%)
Important! 401(k) limits are per calendar year, not per plan. If you worked for another company for the first half of the year and already maxed out your 401(k), you cannot contribute to the Amazon 401(k) until January 1 of the following year.
If you’re wondering how much you contributed at your prior employer, you can look up your year-to-date contributions on a 401(k) statement. Then, solve for the remaining amount that would get you to $20,500 and set your 401(k) contribution to hit that amount.
Example: you contributed $10,000 to your 401(k) at ABC Company this year. You joined Amazon part way through the year. You can contribute an additional $10,500 to your Amazon 401(k) before year end, bringing your total to $20,500.
Utilize the “After-Tax” or “Mega Back-Door Roth” Strategy
From January 2020 on, Amazon employees have had the option of using “after-tax” contributions - AKA the “Mega Back-Door” Roth. This extra contribution can supercharge your retirement savings and their tax efficiency (we love tax diversification). Let’s break this down below.
First, let’s review how contribution limits work:
The current limit on total 401(k) contributions from employers and employees is $61,000 (in 2022). I know, we’ve been referring to $20,500 this entire time, $61,000 is the total contribution limit in a 401(k) *mind blown*
In 2022, the IRS limit on pre-tax and/or Roth 401(k) contributions for people younger than 50 is $20,500. If you turn 50 this year or you are older than 50, you can contribute an additional $6,500, bringing your total to $67,500.
Amazon employees who contribute at least 4% of their salary to the pre-tax and/or Roth 401(k) will receive a 2% match.
Assuming you make $160,000 a year, your matching funds from Amazon would be $3,200.
Given the facts above, you would be able to contribute an additional $37,300 into your after-tax 401(k)!
Pre-tax and/or Roth limit: $20,500
Amazon match at 2% of $160,000: $3,200
After-tax contribution limit: $37,300
Total contributions: $61,000
Add $6,500 to pre-tax and/or Roth limit if over age 50.
Lastly, and VERY important! You’ll see a small dropdown menu below your after-tax enrollment on your contributions page in Fidelity NetBenefits that defaults to “don’t convert my after-tax to Roth.” Make sure to switch this to “convert my after-tax to Roth.”
The magic of the “mega back-door Roth” is this final step. When elected to “convert my after-tax to Roth” your after-tax contributions will be automatically converted to Roth (which makes sense), making all future investment growth completely tax-free! Fidelity completes this “in-plan Roth conversion” on a daily basis for you once elected. Because of this, there will be minimal to no tax upon conversion, because you have no investment gains to convert to Roth!
If you don’t elect this and leave as is, all of the investment growth on your after-tax contributions will be taxable in the future. This is not the end of the world, but it’s certainly better to have tax-free growth on after-tax contributions if given the chance!
Consider Additional Investments
You’ll get a Fidelity NetBenefits Account as part of the sign-up process for Amazon’s 401(k). You’ll be able to use this account to manage just about any aspect of your plan.
Along with information on Amazon’s plan, Fidelity’s platform offers a menu of 26 investment options. There, you’ll find:
Index funds. These passively managed funds make it easy for people to invest in stocks. An index fund consists of stocks that mirror a given market index, such as the S&P 500.
Target date funds. This type of fund is named for its connection to an investor’s “target date” for retirement. Start by choosing a fund that matches your expected year of retirement. As that date gets closer, investments in the fund will shift to reduce risk over time.
Actively managed funds. Unlike passively managed funds, actively managed funds are run by people determining when to buy or sell investments. That extra workload usually equates to higher management fees. Still, it could pay off if the human touch helps your fund outperform the market.
Amazon stock fund. Giving you the ability to buy, sell, and receive matching contributions in your 401(k) in Amazon stock.
Get Expert Guidance
One of the best and simplest methods of planning for financial independence is to max your 401(k). And, Amazon employees can take an essential step towards preparing for the rest of their lives with the benefits provided to them, if leveraged the right way.
With that said, when it comes to 401(k) management, these tips are just the tip of the iceberg. To manage your retirement account, you’ll need to make countless choices over the years–but you don’t need to do it alone. Consilio Wealth Advisors provides expert advice in transparent, easy-to-understand terms. We’re here to help clients map out their financial journey to financial independence and ensure decisions are made to meet long-term goals. Start empowering your journey to financial independence today.
Disclosures
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Consilio Wealth Advisors is not affiliated with Amazon. While CWA communicates with its clients regarding their Amazon employee benefits, and educates itself on Amazon Benefits, there is no guarantee that the information we have provided is accurate. Amazon employees are encouraged to contact their employer should they have any questions regarding their specific employee benefits. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
