More companies are offering an after-tax 401(k) option for big savers

Prathanchorruangsak | Istock | Getty Images

Maxing out your 401(k) isn’t easy, but if you reach the limit with money to spare, there may be a way to save more. 

In 2022, employees can defer $20,500 plus $6,500 for investors 50 and older. However, after-tax contributions may bypass those caps up to $61,000, including company matches, profit sharing and other plan deposits. 

While most plans still don’t have the feature, the numbers have been creeping higher. Some 21% of company plans offered after-tax 401(k) contributions in 2021, up from 19% in 2020, according to Vanguard. 

More from Personal Finance:
Your next quarterly 401(k) statement may be alarming
Annuity sales buoyed by fear, higher rates. What to know
What happens to unpaid 401(k) loans if you leave your job

You can use the funds for the so-called mega-backdoor Roth maneuver — paying levies on earnings and moving the money to a Roth individual retirement account — for future tax-free growth. 

An estimated 14% of employees maxed out 401(k) plans in 2021, according to Vanguard, and 10% of workers with access to after-tax 401(k) contributions participated.

“It can be a really, really powerful technique for the right individual,” said certified financial planner Dan Galli, owner at Daniel J. Galli & Associates in Norwell, Massachusetts.

If they’re young enough and have years of tax-free growth ahead of them, it could be a game-changer.

JoAnn May

financial planner at Forest Asset Management

By rolling the money into a Roth IRA, investors may start building a tax-free pot of money for retirement, without rules to take the money out at a certain age.

“If they’re young enough and have years of tax-free growth ahead of them, it could be a game-changer,” said JoAnn May, a CFP and CPA with Forest Asset Management in Berwyn, Illinois.

After-tax vs. Roth accounts

It’s easy to…

Read complete post here:
Source link