More companies are offering an after-tax 401(k) option for big savers


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Maxing out your 401(k) isn’t easy, but if you reach the limit with money to spare, there may be a way to save more. 

In 2022, employees can defer $20,500 plus $6,500 for investors 50 and older. However, after-tax contributions may bypass those caps up to $61,000, including company matches, profit sharing and other plan deposits. 

While most plans still don’t have the feature, the numbers have been creeping higher. Some 21% of company plans offered after-tax 401(k) contributions in 2021, up from 19% in 2020, according to Vanguard

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You can use the funds for the so-called mega-backdoor Roth maneuver — paying levies on earnings and moving the money to a Roth individual retirement account — for future tax-free growth. 

An estimated 14% of employees maxed out 401(k) plans in 2021, according to Vanguard, and 10% of workers with access to after-tax 401(k) contributions participated.

“It can be a really, really powerful technique for the right individual,” said certified financial planner Dan Galli, owner at Daniel J. Galli & Associates in Norwell, Massachusetts.

If they’re young enough and have years of tax-free growth ahead of them, it could be a game-changer.

JoAnn May

financial planner at Forest Asset Management

By rolling the money into a Roth IRA, investors may start building a tax-free pot of money for retirement, without rules to take the money out at a certain age.

“If they’re young enough and have years of tax-free growth ahead of them, it could be a game-changer,” said JoAnn May, a CFP and CPA with Forest Asset Management in Berwyn, Illinois.

After-tax vs. Roth accounts

It’s easy to confuse after-tax 401(k) contributions with a Roth 401(k) account since both allow you to save money after taxes, but there are key differences.

For 2022, employees under age 50 may defer up to $20,500 of their salary into their company’s regular pretax or Roth (after-tax) 401(k) account.

However, you can make additional after-tax contributions to your traditional 401(k), which allows you to save more than the $20,500 cap.

For example, if you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, you may save another $32,500 before hitting the $61,000 plan limit for 2022.

The other twist is how earnings are taxed. While Roth 401(k) withdrawals (including earnings growth) are tax-free in retirement, any earnings on those “bonus” amounts added to traditional 401(k) plans are taxed.

“That’s why it’s important to get [after-tax contributions] out of the 401(k) plan periodically,” May said.

Once per year, her clients withdraw after-tax contributions and earnings and roll the money into a pretax or Roth IRA. The downside of the Roth IRA option is there may be a tax bill on growth at the conversion.

Plans with after-tax 401(k) contributions may not educate employees about the option. In some cases, advisors may discover the feature buried deep within a client’s benefits paperwork.

“The most important thing is to read your employee benefits handbook and pass it on to your advisor,” said May.

Tax-free income

Some retirees may also pay more for Medicare premiums. While most retirees don’t pay for Medicare Part A, the base price for Medicare Part B starts at $170.10 for 2022.

Depending on their income, retirees may have to pay more for Medicare Part B, with top earners paying monthly premiums of $578.30.



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