How after-tax 401(k) contributions benefit you
One of the main benefits of saving for your retirement through an employer-sponsored 401(k) is that you make contributions with pretax dollars. This allows you to grow your retirement savings tax-free with money you contributed before paying annual taxes, which lowers your overall taxable income for the year.
The IRS limits 401(k) contributions to $19,500 per year (or $26,000 if you are age 50 and older). However, some employers include an after-tax 401(k) contributions clause in their plans. This means you may continue making contributions up to $58,000 (or $64,500 if you are age 50 or older) with post-tax dollars.
Whether this is in your best interest depends on your individual circumstances and your retirement goals.
Why would you want to make after-tax 401(k) contributions?
Since one of the main benefits of a 401(k) is lowering your tax liability with pretax contributions, why would you want to contribute more that will be subject to taxable income?
In short, it is because the contributions you make with post-tax dollars still grow tax deferred in your 401(k) account over the years until you reach your retirement age. If you have enough funds to spare and want to bolster your 401(k) portfolio and diversify your investments, contributing as much as possible may be the right strategy for you.
These contributions are also eligible to be rolled over into a Roth IRA. It may be in your interest to roll over your post-tax 401(k) contributions into a Roth IRA because Roth IRA withdrawals are not subject to taxes when you reach your eligible retirement age and if you have had an IRA account open for at least five years.
Talk to a ProVise CFP® professional about your retirement saving strategy
Does your employer offer an option for contributing post-tax dollars to your 401(k) account? This could be an excellent opportunity to boost your savings and reach your retirement goals. However, it can be difficult to know how much to contribute to your future without compromising your life now. That’s where we come in.
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a personal financial plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about planning for your retirement? Contact ProVise today to schedule a complimentary consultation.