Easy methods to save above 401(ok) deferral limits with after-tax contributions

For those who’ve already maxed out 401(ok) plan contributions for 2022 and also you’re keen to avoid wasting extra for retirement, some plans have an under-the-radar possibility, consultants say.

For 2022, you can defer $20,500 right into a 401(ok), plus an additional $6,500 for buyers 50 and older. However the complete plan restrict is $61,000 per employee, together with matches, revenue sharing and different deposits. And a few plans allow you to exceed the $20,500 deferral restrict with so-called after-tax contributions. 

“It is undoubtedly one thing higher-income individuals might need to take into account on the finish of the yr in the event that they’re searching for locations to place further financial savings,” mentioned licensed monetary planner Ashton Lawrence, a associate at Goldfinch Wealth Administration in Greenville, South Carolina.

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After-tax versus Roth accounts

After-tax contributions are completely different than Roth 401(k) plans. Whereas each methods contain saving cash after taxes, there are some key variations.

For 2022, when you’re below 50, you may defer up to $20,500 of your wage into your plan’s common pretax or Roth 401(ok) account. The share of plans providing a Roth 401(ok) saving possibility has surged over the past decade.

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Nonetheless, some plans supply further after-tax contributions to your conventional 401(ok), which lets you save greater than the $20,500 cap. For instance, when you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, it’s possible you’ll save one other $32,500 earlier than hitting the $61,000 plan restrict for 2022.

Whereas the variety of plans providing after-tax 401(ok) contributions has been rising, it is nonetheless much less widespread amongst smaller firms, in accordance with an annual survey from the Plan Sponsor Council of America.

In 2021, roughly 21% of firm plans supplied after-tax 401(ok) contributions, in comparison with about 20% of plans in 2020, the survey discovered. And nearly 42% of employers of 5,000 or extra offered the choice in 2021, up from about 38% in 2020.

Regardless of the uptick, after-tax 401(ok) participation declined in 2021, dropping to about 10% from almost 13% the earlier yr, the identical survey confirmed.

Leverage the ‘mega backdoor Roth’ technique

As soon as you have made after-tax contributions, the plan might enable what’s referred to as a “mega backdoor Roth” technique, which incorporates paying levies on development and shifting the funds for future tax-free development.

“That is a pleasant strategy to go forward and begin boosting that tax-free cash for these future years,” Lawrence mentioned.

Relying on the plan guidelines, it’s possible you’ll switch the cash to a Roth 401(ok) throughout the plan or to a separate Roth particular person retirement account, defined Dan Galli, a CFP and proprietor at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many particulars to contemplate, working with an advisor could also be worthwhile.

Nonetheless, “there is a truthful variety of professionals — from CPAs, attorneys, wealth managers and monetary planners — who do not perceive or should not conversant in in-plan Roth [401(k)] rollovers,” he mentioned.  

There is a truthful variety of professionals — from CPAs, attorneys, wealth managers and monetary planners — who do not perceive or should not conversant in in-plan Roth [401(k)] rollovers.

Dan Galli

Proprietor at Daniel J. Galli & Associates

Whereas the “knee-jerk response” is to roll after-tax 401(ok) funds out of the plan right into a Roth IRA, buyers must “know the foundations” and doable downsides, reminiscent of shedding entry to institutional pricing and funds, Galli mentioned.

“There is not any proper or incorrect,” he mentioned. “It is simply understanding the benefits, and my impression is most individuals do not perceive that you are able to do this all throughout the 401(ok).”

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