Here’s how after-tax 401(k) contributions can help with those big 2023 retirement savings goals

If you’re on track to max out your 401(k) plan for 2023 and want to save more, your plan may have another option: after-tax contributions.

For 2023, you can defer up to $22,500 in a 401(k), and savers age 50 and older can add another $7,500. Some plans allow more through after-tax 401(k) contributions.

Remember, the total plan limit for 2023 is $66,000, which includes your deferment, company match, profit sharing and other deposits from your employer.

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About 14 percent of workers have expanded their 401(k) plans in 2021, according to Vanguard, based on 1,700 plans and about 5 million participants.

After-tax 401(k) contributions can be worth considering if you are a higher income looking for more ways to save, explains Ashton Lawrence, a certified financial planner and partner at Goldfinch Wealth Management in Greenville, South Carolina.

After-tax 401(k) contributions are different from Roth 401(k) savings. While both involve deferring a portion of your after-tax payments, there are some important differences.

For 2023, if you are under 50, you can defer up to $22,500 of your salary in your regular pretax plan or Roth 401(k) account. The number of plans that offer a Roth 401(k) savings option has increased over the past decade.

However, some plans offer additional after-tax contributions to a traditional 401(k), allowing you to save more than $22,500. For example, if you defer $22,500 and your employer spends $8,000 for matches and profit sharing, you can save another $35,500 before hitting the $66,000 plan limit for 2023.

While the number of after-tax 401(k) contribution plans is increasing, it is still not common among small businesses, according to an annual survey from the American Plan Sponsorship Council.

In 2021, about 21% of company plans offered after-tax 401(k) contributions, compared to about 20% of plans in 2020, the study found. And about 42% of employers of 5,000 or more offered the option in 2021, up from about 38% in 2020.

Despite the uptick, after-tax 401(k) participation is down in 2021, falling to about 10% from about 13% last year, the same study showed.

Once you make an after-tax contribution, the plan may allow what’s known as a “mega backdoor Roth” strategy, which involves paying taxes on growth and moving the money toward tax-free growth in the future.

“It’s a great way to continue to grow that tax-free income for years to come,” Lawrence said.

Depending on the plan’s rules, you can transfer the money to a Roth 401(k) within the plan or to a separate Roth retirement account, says Dan Galli, CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. . And with so many details to consider, working with a consultant can be beneficial.

However, “there are many professionals – from CPAs, attorneys, wealth managers and financial planners – who do not understand or are not familiar with the Roth plan. [401(k)] rollovers,” he said.

While the “knee-jerk” option is to roll over after-tax 401(k) money from the plan into a Roth IRA, investors need to be aware of the rules and possible downsides, such as losing access to fees and charges, Galli said. .

“There is no right or wrong,” he said. “It’s understanding the benefits, and my opinion is that most people don’t understand that you can do all of this in a 401(k).”