How to Save Above 401(k) Carryover Limits with After-Tax Contributions
If you’ve already maxed out 401(k) contributions for 2022 and want to save more for your retirement, some plans offer a low-key option, experts say.
For 2022, you can carry $20,500 into a 401(k), plus an additional $6,500 for investors age 50 and older. But the plan’s total limit is $61,000 per worker, including matches, profit sharing and other deposits. And some plans allow you to exceed the $20,500 carry-forward limit with so-called after-tax contributions.
“It’s definitely something high-income people might want to consider at the end of the year if they’re looking for places to save more,” certified financial planner Ashton Lawrence, partner at Goldfinch Wealth Management told Greenville, South Carolina.
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After-Tax Accounts vs. Roth Accounts
After-tax contributions are different from Roth 401(k) plans. Although both strategies involve saving money after taxes, there are key differences.
For 2022, if you’re under age 50, you can defer up to $20,500 of your salary to your plan’s regular pretax or Roth 401(k) account. The percentage of plans offering a Roth 401(k) savings option has increased over the past decade.
However, some plans offer additional after-tax contributions to your traditional 401(k), saving you more than the $20,500 limit. For example, if you defer $20,500 and your employer contributes $8,000 for matchmaking and profit sharing, you can save an additional $32,500 before reaching the plan limit of $61,000 for 2022.
While the number of plans offering after-tax 401(k) contributions has increased, it’s even less common among small businesses, according to an annual survey by the Plan Sponsor Council of America.
In 2021, about 21% of company plans offered after-tax 401(k) contributions, up from about 20% of plans in 2020, according to the survey. And nearly 42% of employers with 5,000 or more people offered this option in 2021, up from about 38% in 2020.
Despite the rise, after-tax 401(k) participation declined in 2021, falling to around 10% from nearly 13% the year before, according to the same survey.
Leverage the “mega Roth backdoor” strategy
Once you’ve made after-tax contributions, the plan may allow for what’s known as a “mega Roth backdoor” strategy, which includes paying growth drawdowns and moving funds for future growth in tax free.
“It’s a great way to move forward and start building that tax-free money for years to come,” Lawrence said.
Depending on the plan’s rules, you can transfer the money to a Roth 401(k) within the plan or to a separate Roth Individual Retirement Account, Dan Galli, CFP and owner of Daniel J. Galli & Associates told Norwell. , Massachusetts. And with many details to consider, working with an advisor can be worthwhile.
However, “there are a fair number of professionals – CPAs, lawyers, wealth managers and financial planners – who don’t understand or are unfamiliar with Roth en plan. [401(k)] reversals,” he said.
While the “gut reaction” is to move the plan’s after-tax 401(k) funds into a Roth IRA, investors should “be aware of the rules” and possible downsides, such as losing access to prices and funds. institutions, says Galli.
“There is no right or wrong,” he said. “It’s just about understanding the benefits, and I feel like most people don’t understand that you can do anything in the 401(k).”