The $20.6 Million Janitor Math

The Dow lost 1,153 points on Wednesday and that is what everyone wants to talk about. I want to talk about a different number from the same week’s paper: $20.6 million.

That is what a worker who simply contributed the maximum to a 401(k) every year from 1984 through 2019 — adding the catch-up once eligible, invested at plain S&P 500 returns, never once being clever — would have had by the end of 2024. No startup shares. No inheritance. No timing. Just the boring maximum, every year, for thirty-five years.

The Journal ran a guide this week on “supersizing” retirement accounts, and I read it the way a mechanic reads a repair manual — checking whether the steps match what I actually see under the hood. They do, and most people are stopping at step one.

Step one is the maximum: $24,500 this year into a 401(k), $32,500 if you are 50 or older, $35,750 between 60 and 63. Most people who think they are maxing out are actually contributing “a lot,” which is a different number.

Step two is the backdoor. If you earn too much to contribute to a Roth IRA directly — and the cutoffs are lower than people think — you can still fund a traditional IRA with after-tax money and convert it. Paperwork, not magic.

Step three is the one almost nobody uses, and it is the reason I am writing this letter. The real ceiling on a 401(k) is not $24,500. It is $72,000. If your plan allows after-tax contributions — and nearly two-thirds of large plans now do — you can contribute up to another $47,500 beyond the normal limit and convert it to Roth inside the plan, where it grows tax-free forever. This is the mega-backdoor. The gate is a single question to HR: “Does our plan allow after-tax contributions and in-plan Roth conversions?” I have watched that one question be worth six figures over a career. Most people have never asked it because they have never heard of it.

Step four is for the business owners: the cash balance plan. There were 1,477 employers with one in 2001. There are more than 25,000 now. It sits on top of the 401(k), it is technically a pension so the 401(k) limits do not apply to it, and for a practice owner or contractor in their peak years it can shelter multiples of what the 401(k) alone can. This is not exotic. It is the single highest-leverage planning meeting I take.

And for my teachers: you have your own version of this that the private sector would kill for. Many of you can contribute to a 403(b) and a 457 in the same year — two separate limits, stacked. Almost nobody does it. Your pension is the floor, not the ceiling.

One more thing from the same paper, because it made me smile. The Journal profiled the most generous employer plans in America. Costco puts in 4% to 9% of pay whether the employee contributes or not. Boeing matches 10%. And the most generous number on the list belongs to Altria — the tobacco company — at 13% to 17% total employer contribution. Long-time readers know we added a tobacco sleeve to the income books this month because the industry generates more cash than it knows what to do with. Apparently even their janitors get a piece.