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).
Stuart J. Oberman, Esq.
Stuart J. Oberman is the founder and President of Oberman Law Firm. Mr. Oberman graduated from Urbana University and received his law degree from John Marshall Law School. Mr. Oberman has been practicing law for over 30 years, and before going into private practice, Mr. Oberman was in-house counsel for a Fortune 500 Company.
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