If you participate in an employer-sponsored 401(k) plan, you may be able to contribute up to $19,500 to your retirement in 2021. But did you know that some plans may allow you to contribute up to $38,500 or more?
If you are looking for increased savings options, find out if your existing plan allows additional after-tax 401(k) contributions. In 2021, some after-tax 401(k)s have a total plan maximum of $58,000, including traditional contributions, employer contributions, and after-tax contributions. As is true for traditional 401(k)s, these limits may be higher ($64,500) if you are age 50 or older.
Be aware that after-tax contributions may not in some cases be tax-deductible. The contributions grow tax-deferred, meaning the earnings will be taxed as income when you withdraw them. (This differs from Roth 401(k) contributions in which the entirety of the account balance grows tax-free.)
Benefits of after-tax contributions: After-tax 401(k) accounts are beneficial for high-income earners looking to put away extra funds in a tax-advantaged investment account. Your contributions may grow tax-deferred, and the compound value of those tax savings, over time, may be able to provide a sizable boost to your retirement account.
In-plan Roth rollovers: If your 401(k) plan allows you to move your after-tax money, you may be able to boost your tax advantages with an in-plan Roth rollover. Referred to by some as the “mega backdoor Roth,” this strategy may allow you to get funds into a Roth IRA regardless of your income.
Per the IRS, once your income exceeds a certain limit, you can no longer contribute directly to a Roth IRA. However, you may be able to make after-tax contributions to a 401(k) first and then roll those into a Roth IRA. The sooner you make the rollover, the more years you get of tax-free earnings. (Always check with your CPA and financial advisor).
Note, however, that in-plan Roth rollovers may be subject to required minimum distribution rules when you retire unless you move the in-plan Roth funds to a regular Roth IRA outside your retirement plan after you leave your employer but before you turn 70 ½. If you don’t already have a Roth IRA account outside your retirement plan at that time, you may be subject to a five-year holding period. (Again, always confer with your CPA and financial advisor).