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save above 401(ok) deferral limits with after-tax contributions

In case you’ve already maxed out 401(ok) plan contributions for 2022 and also you’re keen to save lots of extra for retirement, some plans have an under-the-radar possibility, specialists say.

For 2022, you can defer $20,500 right into a 401(ok), plus an additional $6,500 for buyers 50 and older. However the complete plan restrict is $61,000 per employee, together with matches, revenue sharing and different deposits. And a few plans allow you to exceed the $20,500 deferral restrict with so-called after-tax contributions. 

“It is positively one thing higher-income folks might wish to take into account on the finish of the 12 months in the event that they’re on the lookout for locations to place further financial savings,” mentioned licensed monetary planner Ashton Lawrence, a accomplice at Goldfinch Wealth Administration in Greenville, South Carolina.

Extra from Private Finance:
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63% of Americans now live paycheck to paycheck as inflation outpaces wages
IRS: Here are the new income tax brackets for 2023

After-tax versus Roth accounts

After-tax contributions are totally different than Roth 401(k) plans. Whereas each methods contain saving cash after taxes, there are some key variations.

For 2022, when you’re underneath 50, you’ll be able to defer up to $20,500 of your wage into your plan’s common pretax or Roth 401(ok) account. The proportion of plans providing a Roth 401(ok) saving possibility has surged over the past decade.

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Nevertheless, some plans provide further after-tax contributions to your conventional 401(ok), which lets you save greater than the $20,500 cap. For instance, when you defer $20,500 and your employer kicks in $8,000 for matches and profit-sharing, chances are you’ll save one other $32,500 earlier than hitting the $61,000 plan restrict for 2022.

Whereas the variety of plans providing after-tax 401(ok) contributions has been rising, it is nonetheless much less widespread amongst smaller firms, in response to an annual survey from the Plan Sponsor Council of America.

In 2021, roughly 21% of firm plans supplied after-tax 401(ok) contributions, in comparison with about 20% of plans in 2020, the survey discovered. And nearly 42% of employers of 5,000 or extra offered the choice in 2021, up from about 38% in 2020.

Regardless of the uptick, after-tax 401(ok) participation declined in 2021, dropping to about 10% from almost 13% the earlier 12 months, the identical survey confirmed.

Leverage the ‘mega backdoor Roth’ technique

As soon as you have made after-tax contributions, the plan might enable what’s often called a “mega backdoor Roth” technique, which incorporates paying levies on progress and transferring the funds for future tax-free progress.

“That is a pleasant option to go forward and begin boosting that tax-free cash for these future years,” Lawrence mentioned.

Relying on the plan guidelines, chances are you’ll switch the cash to a Roth 401(ok) inside the plan or to a separate Roth particular person retirement account, defined Dan Galli, a CFP and proprietor at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many particulars to think about, working with an advisor could also be worthwhile.

Nevertheless, “there is a honest variety of professionals — from CPAs, attorneys, wealth managers and monetary planners — who do not perceive or usually are not aware of in-plan Roth [401(k)] rollovers,” he mentioned.  

There is a honest variety of professionals — from CPAs, attorneys, wealth managers and monetary planners — who do not perceive or usually are not aware of in-plan Roth [401(k)] rollovers.

Dan Galli

Proprietor at Daniel J. Galli & Associates

Whereas the “knee-jerk response” is to roll after-tax 401(ok) funds out of the plan right into a Roth IRA, buyers have to “know the principles” and attainable downsides, reminiscent of shedding entry to institutional pricing and funds, Galli mentioned.

“There isn’t any proper or mistaken,” he mentioned. “It is simply understanding the benefits, and my impression is most individuals do not perceive that you are able to do this all inside the 401(ok).”

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