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How to Use After-Tax Contributions to Funnel More Into Your 401(k)

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As the end of the year approaches, you may have already maxed out your 401(k) plan contributions for 2022. However, some plans have an option to keep making after-tax contributions past the deferral limits. Described as an “under-the-radar” option to get more funds to grow tax-free, this type of deposit may not be available for all savers.

I spoke with Kip Keener, chief compliance and operations officer at Salem Investment Counselors in North Carolina. Here’s what to know about the potential option to save above 401(k) plan limits with after-tax contributions.

How 401(k) after-tax contributions work

With a 401(k), you get to defer taxes until the money comes out of your plan, allowing it to grow tax-free for years. Plus, because it’s automated, it makes investing easy—especially if you’re a cautious saver.

The 2022 401(k) deferral limit is $20,500 (plus an extra $6,500 for investors 50 and older). However, some plans offer additional after-tax contributions to your traditional 401(k). Keener explains that these so-called after-tax contributions allow you to exceed the typical 401(k) cap, and that those funds don’t get invested any differently than the money within the traditional limit. Someone might be tempted by this if they have excess cashflow post-taxes and want to see it grow tax-free with the rest of their retirement funds.

However, Keener is in favor of people doing after-tax investing outside of retirement plans rather than inside of them, such as through Vanguard or Fidelity. Here’s our guide to building an easy “set and forget” investment portfolio.

Ultimately, this strategy is not available to most

401(k) plans that are expansive enough to allow this “under the radar” option, though, are still fairly rare: CNBC reports that in 2021, roughly 21% of company plans offered after-tax 401(k) contributions. In Keener’s experience, this is not something you typically see from mid-level and small employer plans. These after-tax contributions are really only something you run into at sophisticated, high-level corporations.

Some good news for the rest of us, though: If you do have a 401(k), you can save way more money in it next year. Here’s how.

   

Read the full article here

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