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In the event you’re wanting to funnel as a lot as attainable into your 401(okay), some plans have a particular characteristic to avoid wasting past the annual deferral restrict.
The 2023 deferral restrict for 401(okay) plans is $22,500, plus an extra $7,500 if age 50 or older. However one stealthy choice, referred to as an after-tax 401(okay) contribution, saves you as much as $66,000, together with employer matching contributions, revenue sharing and different plan deposits.
For these in search of tax-friendly methods to extend retirement financial savings, “it is only a nice alternative,” mentioned licensed monetary planner Dan Galli, proprietor of Daniel J. Galli & Associates in Norwell, Massachusetts.
Nevertheless, most 401(okay) plans nonetheless do not supply after-tax contributions on account of strict plan design legal guidelines, Galli mentioned. However it’s extra widespread amongst bigger firms.
In 2021, about 21% of the corporate’s plans supplied after-tax 401(okay) contributions, in contrast with about 20% of plans in 2020, in accordance with an annual survey by the Plan Sponsor Council of America. And practically 42% of employers of 5,000 or extra offered the choice in 2021, up from 38% in 2020.
Nonetheless, staff who’ve the chance to make after-tax 401(okay) contributions could miss out due to “money circulate points,” Galli mentioned.
Solely about 14% of staff maxed out 401(okay) plans in 2021, in accordance with Vanguard, based mostly on 1,700 plans and practically 5 million contributors.
Tax-free progress is ‘completely invaluable’
One other benefit of after-tax 401(okay) contributions is that you should utilize the funds to finish the so-called Roth mega-backdoor technique (pay taxes on earnings and transfer the cash right into a Roth account) for future tax-free progress. .
By transferring the cash to the identical plan’s Roth 401(okay) account or to a separate Roth particular person retirement account, you may start to construct a tax-free supply of cash that will not be taxed on future withdrawals.
“It is completely price it,” mentioned Linda Farinola, CFP and enrolled agent with Princeton Monetary Group in Plainsboro, New Jersey, noting that tax-free withdrawals could be useful in retirement.
When it is time to withdraw the cash, these accounts will not enhance adjusted gross revenue, which might set off different tax penalties, comparable to increased Medicare Half B or D premiums, he mentioned.
Prioritize your 401(okay) match first
After all, you may need to reap the benefits of your employer’s 401(okay) match via pre-tax deferrals or a Roth 401(okay) earlier than making after-tax contributions, Farinola mentioned.
The commonest 401(okay) match is 50 cents on the greenback of worker contributions, as much as 6% of compensation, in accordance with the Plan Sponsor Council of America. But hundreds of thousands of People aren’t pushing aside lengthy sufficient to get the corporate’s full match.