Are you looking to maximize your 401(k) contributions for the upcoming year? If so, you may have the option to go beyond the standard yearly limit with after-tax contributions. While the maximum limit for 2023 is $22,500, you can add an extra $7,500 if you’re over 50. However, after-tax contributions can push the limit to $66,000, including various deposits and matches.
According to certified financial planner Dan Galli, after-tax contributions are a great option for those who can comfortably save beyond the standard employee deferral limit. Still, only 10% of employees took advantage of this feature in 2022, with most of them having higher incomes and longer job tenure.
Before delving into after-tax contributions, it’s crucial to maximize pretax or Roth deferrals to capture your employer match. Only then should you consider where your next contribution dollars will go. Advisors typically take a holistic approach when allocating funds, considering goals, timeline, and other factors.
After-tax and Roth contributions both begin with after-tax deposits. While Roth contributions grow tax-free, after-tax deposits grow tax-deferred and require income taxes upon withdrawal. To minimize taxation on growth, consider periodic conversions to a Roth account.
Converting after-tax contributions to a Roth account can help you avoid taxation on all growth, making it a financially savvy move. Galli recommends converting funds to Roth accounts at least quarterly to maximize the benefits.
In the end, after-tax contributions can be a valuable tool for boosting your retirement savings, but it’s essential to weigh the pros and cons based on your individual circumstances. Consult with a financial advisor to determine the best strategy for your financial goals.
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