How to Use After-Tax Deductions to Send More Funds to Your 401(K) Form
As the end of the year approaches, you may have already exhausted your 401(k) plan contributions for 2022. However, some plans have the option to continue making after-tax contributions beyond the deferral limit. Described as a “silent” option for tax free growth, this type of deposit may not be available to all savers.
I spoke with Kip Keener , Director of Compliance and Operations at Salem Investment Counselors in North Carolina. Here’s what you need to know about the potential to save beyond your 401(k) plan limits with after-tax contributions.
How 401(k) after-tax deductions work
With a 401(k), you can defer taxes until the money comes from your plan, allowing it to grow tax-free for many years. Also, since it’s automated, it makes investing easier, especially if you’re careful.
The 401(k) deferral limit for 2022 is $20,500 (plus an additional $6,500 for investors age 50 and over). However, some plans offer additional after-tax deductions to your traditional 401(k). Keener explains that these so-called after-tax contributions allow you to exceed the typical 401(k) limit, and that these funds are not invested differently than money under the traditional limit. It might be tempting for some if they have excess after-tax cash flow and want it to grow tax-free along with the rest of their pension funds.
However, Keener advocates for people to invest after taxes outside of retirement plans rather than inside them, such as through Vanguard or Fidelity. Here’s our guide to building an easy “set it and forget it” investment portfolio.
Ultimately, this strategy is beyond the reach of most
401(k) plans that are broad enough to allow this option “invisibly” are still quite rare: CNBC reports that in 2021, approximately 21% of companies’ plans offered after-tax 401(k) contributions. In Keener’s experience, this is not what you usually see in the plans of a medium and small employer. These after-tax deductions are something that can only be encountered in sophisticated high-end corporations.
However, there is good news for all of us: if you have a 401(k), you can save a lot more money on it next year. Here’s how .