- If you want to put as much money into your 401(k) as possible, some plans have special features that can save you over your annual deferral limit.
- According to the Plan Sponsor Council of America, about 20% of company plans offered after-tax 401(k) contributions in 2021.
- After-tax 401(k) deposits can be used to initiate a “mega backdoor loss” strategy. This includes paying taxes on growth and moving funds for future tax-free growth.
Prostock Studios | In Stock | Getty Images
If you want to put as much money into your 401(k) as possible, some plans have special features that can save you over your annual deferral limit.
The 2023 deferral limit for 401(k) plans is $22,500, plus an additional $7,500 if you’re 50 or older. But a discreet option known as after-tax 401(k) contributions can save you up to $66,000, including employer matching, profit sharing, and other planning deposits.
For those looking for tax-friendly ways to increase their retirement savings, “this is just the right opportunity,” says certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts. It is.”
However, most 401(k) plans still don’t offer after-tax contributions due to strict plan design laws, Galli said. However, it is more common in large companies.
About 21% of corporate plans provided after-tax 401(k) contributions in 2021, compared to about 20% of plans in 2020, according to the Plan Sponsors Council of America’s annual survey. And from about 38% in 2020 to nearly 42% of employers with more than 5,000 employees in 2021, they offered the option.
Still, employees who have the opportunity to pay their after-tax 401(k) contributions may not be able to because of “cash flow issues,” Galli said.
According to Vanguard, only about 14% of employees ran out of 401(k) plans in 2021, based on 1,700 plans and nearly 5 million participants.
Another benefit of after-tax 401(k) contributions is that the funds can be used to complete the so-called Mega Backdoor Roth strategy for future tax-free growth.
By putting money into a Roth 401(k) or another Roth personal retirement account in the same plan, you can start building a tax-free pot of money that will not accrue tax on future withdrawals.
“Absolutely worth it,” said Linda Farinola, a CFP and registered agent at Princeton Financial Group in Plainsboro, New Jersey, who said tax-free withdrawals could come in handy in retirement.
When it comes time to withdraw the money, these accounts may not be able to boost your adjusted gross income and may cause other tax implications, such as higher Medicare Part B or D premiums.
Of course, you’ll want to take advantage of your employer’s 401(k) match through pre-tax or Roth 401(k) deferrals before making an after-tax contribution, Farinola said.
According to the Plan Sponsor Council of America, the most common 401(k) match is 50 cents for every dollar an employee contributes, up to 6% of compensation. Still, millions of Americans haven’t held off long enough to get a full company match.