Maximize Your Retirement Savings: After-Tax Contributions To Your 401K

Saving from your earnings in a 401k plan is one of the most reliable ways to prepare for your retirement.

How Money Gets Into a 401k

Many employers offer 401k plans for their employees. Elective deferrals – money from your paycheck – is deposited directly into the 401k plan. These elective deferrals are either pre-tax, lowering your tax bill now, or designated Roth contributions which lower your tax bill later.

Employers typically match some portion of your contributions.

If your company is profitable, they may elect to provide a profit-sharing contribution to your account.

Matches and profit-sharing are always pre-tax.

Limits Apply

You can personally save (defer) a maximum of $20,500 into your 401k. This can be any combination of pre-tax or Roth deferrals, but the total cannot exceed $20,500 for 2022.

The cap for all contributions is $61,000 for 2022. Age 50 and above can add a catch-up of $6500 on top of these amounts.

After-tax Contributions to your 401k: A Supercharged Retirement Strategy?

Why bother?

If your employer allows for after-tax contributions AND allows for in-plan conversion to the designated Roth account, then you can complete a:

Mega Backdoor Roth Conversion

Subtract your elective deferrals, your company match, and any profit-sharing from $61,000 or $67,500 if age 50 and above. What’s leftover can be contributed as an after-tax contribution and in turn, converted to the Roth account in the 401k.

The Roth is arguably the best shelter for your retirement savings

Make Sure You Get It Right!

After-tax contributions to your 401k and the mega backdoor Roth conversions are excellent tax-advantaged strategies for your retirement savings. Make certain you understand the impact of choosing to forgo pre-tax deferrals and the potential impact on taxes owed and available tax credits.

If you’ve found yourself with more money to save and think that this could be a good strategy for you, please seek professional advice before committing to anything. We can help to look things over and make sure you’re going to be maximizing your savings. So if you’d like to talk through this or any other aspect of your retirement savings, please do give us a call.