The Shell Provident Fund 401(k) is a valuable retirement savings option for Shell employees. It offers a variety of investment options, a generous employer match, and tax-deferred growth. However, even with these advantages, many Shell employees make mistakes when contributing to their 401(k). Let’s dive into how you can avoid these mistakes to get the most from your Shell Provident Fund and the benefits Shell offers you through it.
1) Save More in Your 401(K): 2024 Contribution Limits
Every year, the IRS sets contribution limits for 401(k) plans, which determines how much you and Shell can contribute towards the Provident Fund. If you’re under age 50, the total IRS limit for 401(k) contributions in 2024 from employee or employer contributions is $69,000. For those over age 50, the limit increases to $76,500.
Within those limits, employees can contribute up to $23,500 (or $30,500 if over age 50) to the pre-tax or Roth source in the 401(k). Every dollar that you contribute to your 401(k) today will have the potential to grow, either tax-free or tax-deferred until you withdraw it in retirement.
Additionally, Shell contributes up to 10% of an employee’s salary to the Provident Fund each year up to the annual 415 income limit. This year, the income limit is $345,000, so the most Shell will contribute to any employee’s 401(k) is $34,500 in 2024.
There’s an additional source in the Provident Fund that not all 401(k) plans have called the After-Tax source. After-tax isn’t quite as tax-efficient as the pre-tax or Roth sources in the 401(k), but it serves as a third bucket for saving in the 401(k). Shell determines the amount each year, and for 2024, you can save an additional $11,500 in the after-tax source!
Many Shell employees fail to contribute the maximum amount to their 401(k). This is a mistake because it means they're leaving money on the table. By contributing the maximum amount, you can save more for retirement and take advantage of the account’s growth over time.
2) Contribute to the Most Tax-Efficient Source: Pre-Tax, Roth, or After-Tax
With our Shell clients, one of the most common questions we hear is “What source should I save to in my 401(k)?” Like most things in finance, the answer depends on several factors.
- Are you earning more today than you expect to earn in the future?
- How long do you plan to save in the 401(k)?
- What other sources of retirement income are you expecting in the future outside your 401(k)?
We see many Shell employees contributing to the wrong bucket, so let’s dive into how to get it right.
Pre-Tax
Pre-tax contributions come out of your paycheck before taxes and are taxed when withdrawn in retirement. The pre-tax contributions are deducted from your taxable income the year they’re made. Often, pre-tax contributions are best for those who expect to be in a higher tax bracket in their retirement years than the one they’re in today.
Roth
Roth contributions are made with after-tax dollars, so they are not taxed until you withdraw the money in retirement. If you expect to be in a lower tax bracket in retirement than the one you’re in today, Roth contributions may be a better option than pre-tax.
There is no one-size-fits-all answer to the question of whether to contribute pre-tax or Roth dollars. The best choice for where you save will depend on your individual circumstances, such as your current tax bracket, your expected retirement income, and the time you have until you retire.
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After-Tax
While most people are familiar with pre-tax and Roth sources in the 401(k), few understand after-tax and the financial planning opportunities it can provide.
So, how do after-tax contributions in the 401(k) work? Well, contributions go in after-tax like your Roth contributions. However, at withdrawal, the funds are taxed like both pre-tax and Roth, depending on what you withdraw:
- Any contribution you make is withdrawn tax-free, like a Roth
- Any earnings on those contributions are withdrawn as ordinary income in retirement, like pre-tax
While after-tax is not as tax-efficient as pre-tax or as Roth, it serves as a great additional bucket to contribute to for extra retirement savings. After-tax contributions are not tax-deductible, but they can grow tax-deferred until you withdraw them in retirement. After-tax contributions are made with after-tax dollars, so they can be converted to Roth contributions at any time.
Each year, Shell determines the maximum amount an employee can contribute to the source, and every year, employees can leverage their after-tax source for a strategy known as the Mega Backdoor Roth.
Mega Backdoor Roth
While many of our Shell clients make too much to contribute to a Roth directly, there is a way to get around this using Shell’s 401(k) plan. If you make after-tax contributions to your 401(k), you can convert them to Roth contributions. This is called the "mega backdoor Roth."
While not all 401(k) plans allow for mega backdoor Roth conversions, the Provident Fund does. This provides Shell employees with a great opportunity for tax-free retirement savings, especially if they're looking to save for retirement while earning more than the annual income limits for Roth contributions.
3) Income Limits for the 401(k): Don’t Get Cut Off From Your Provident Fund Contributions
Every year, the IRS announces income limits for 401(k) contributions. These limits, known as the 415 income limits, are indexed each year for inflation. In 2024, the income limit for contributing to a 401(k) is $345,000.
Once you earn more than $345,000 this year, neither you nor Shell can make any additional contributions to the Provident Fund 401(k).
This is a mistake we see ALL the time, especially after a big bonus payout. Here’s how.
Let’s consider Ned, a 51-year-old Shell employee, who makes $350,000 a year in salary and expects a 20% bonus, totaling $70,000.
Ned likes to set up his 401(k) contributions in January each year, so he can set it and forget it. His math looks something like this:
- Total Compensation: $420,000
- Total Contribution Goal to Pre-Tax/Roth/After-Tax: $46,000
- Contribution Total / Total Compensation: 11% Contribution Rate to Max Out the 401(k)
Seems simple enough, right? Unfortunately for Ned, no.
Using this logic, Ned misses $13,916 of contributions because his income cuts off his ability to contribute to the 401(k) after October! Not only is Ned prevented from making contributions to his 401(k), but once his compensation hits the income limit, Shell can’t contribute either. Ned has unknowingly left a LOT of money on the table. And, this is the kind of mistake we often see Shell professionals make every year. But, have no fear, there are two easy answers to fix it in the future.
One simple fix to get more into the Provident Fund is to ensure that he elects to have 401(k) contributions made from his bonus each March. If he’d done so in the example above, he’d be closer to the $46,000 target at $39,783 of contributions. However, we often see people like Ned who don’t have this option elected in their Provident Fund.
Another way is to change how he evaluates his contribution percentage at the beginning of the year. Let’s look at how Ned should approach 401(k) contributions after learning about the 415 income limits.
- Annual Income Limit: $345,000
- Contributions to Pre-Tax/Roth/After-Tax Total: $46,000
- Contribution Total / Annual Income Limit: 13% Contribution Rate to Max Out the 401(k)
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By making a simple tweak to how much he contributes each month and electing to have contributions taken from his bonus, Ned can max out his 401(k) by the time he reaches the income limit in October. Once he’s maxed out his 401(k), Ned can choose to direct his efforts towards other buckets like the backdoor Roth or his HSA for even more tax-efficient retirement savings!
Shell Provident Fund Benefit Restoration Plan
Earlier, we mentioned how Shell contributes up to 10% of an employee’s salary to the 401(k) up to the annual income limit. But, what does that mean for employees like Ned who earn well above the annual income limit?
For those making over the annual income limit, excess 401(k) contributions from Shell flow into a non-qualified plan called the Provident Fund Benefit Restoration Plan (BRP). This non-qualified plan enables Shell to circumvent the 415 limits so they can continue making 401(k) contributions on behalf of the high-income earning employee to these plans for retirement.
Let’s consider what this means for Ned, who makes a total of $420,000 this year.
- Shell’s 401(k) Contribution for Ned: $42,000,
10% of his total compensation - Annual Income Limit: $345,000
- Shell’s Maximum Contribution to the 401(k): $34,500,
10% of the annual income limit - Shell’s Contribution to the BRP: $7,500,
Total Contribution – Maximum 401(k) Contribution from Shell
The BRP provides a simple account where Shell can restore the benefit an employee would otherwise lose due to the IRS’ 415 limits each year. While non-qualified plans offer great benefits to high-income employees during their working years, they can also create serious tax implications when paid out at retirement.
Learn more about the Shell BRP here >>
Getting a Second Opinion on Your Provident Fund from a Fiduciary Financial Advisor
The Shell Provident Fund 401(k) is a valuable retirement savings option for Shell employees. However, there are a few common mistakes that Shell employees make when contributing to their 401(k). By avoiding these mistakes, you can maximize your retirement savings and reach your financial goals.
If you're not sure how to max out your 401(k) fully or how to choose the right investments, you can talk to one of our financial advisors to get started. Willis Johnson & Associates is a financial planning firm with over 20 years of experience helping Shell employees reach their financial goals. We offer a variety of services, including retirement planning, investment management, and estate planning. If you are unsure how to make the most of your 401(k), we encourage you to reach out to our team for a complimentary meeting with an advisor. We can help you develop a personalized retirement plan that meets your individual needs. We offer a complimentary initial consultation to discuss your financial situation and to see if we can help you reach your financial goals. If you are interested in learning more, please contact us today.
