How to save above 401(k) deferral limits with after-tax contributions

If you’re already past your 401(k) plan contributions for 2022 and are eager to save more for retirement, some plans have an off-the-radar option, experts say.

for the year 2022, You can put off 20,500 dollars to 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. Some plans let you bypass the $20,500 deferral 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 put additional savings,” said certified financial planner Ashton Lawrence, partner at Goldfinch Wealth Management in Greenville, South Carolina.

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After taxes are different from Roth 401(k) plans. While both strategies involve saving money after taxes, there are some key differences.

For 2022, if you are under 50, you can Postpone up to $20,500 From your paycheck to your plan’s regular pre-tax or Roth 401(k) account. Percentage of plans that offer a Roth 401(k) savings option soared over the past decade.

However, some plans offer additional after-tax contributions to your traditional 401(k), allowing you to save more than the maximum of $20,500. For example, if you put off $20,500 and your employer kicks $8,000 for matches and profit sharing, you can save another $32,500 before you reach the plan’s $61,000 limit for 2022.

While the number of plans offering after-tax 401(k) contributions is rising, they are still less popular among smaller companies, according to an annual survey from the Plan Sponsorship Council of America.

In 2021, nearly 21% of company plans made after-tax 401(k) contributions, compared to about 20% of plans in 2020, the survey found. Nearly 42% of the 5,000 or more employers offered the option in 2021, up from about 38% in 2020.

The same survey showed that, despite the slight uptick, after-tax 401(k) participation fell in 2021, dropping to about 10% from about 13% the previous year.

Once contributions are made after tax, the plan may allow what is known as ‘Massive Tailgate Ruth’ The strategy, which includes paying growth taxes and moving money for future tax-free growth.

“This is a good way to go forward and start raising the tax-deductible money for those years ahead,” Lawrence said.

Depending on the plan’s rules, you can transfer money to a Roth 401(k) within the plan or to a separate individual Roth retirement account, explained Dan Galli, CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with so many details to consider, working with a counselor can be helpful.

However, “there are quite a few professionals—from chartered accountants, lawyers, wealth managers, and financial planners—who do not understand or are not familiar with the Roth plan. [401(k)] He said.

While the “quick reaction” is to transfer after-tax 401(k) money from the plan to a Roth IRA, investors need to “know the rules” and potential downsides, such as losing access to institutional pricing and funds, Galley said.

He said, “There is no right or wrong.” “It’s just an understanding of the benefits, and my impression is that most people don’t understand that you can do all of this in a 401(k).”