Many people know about their 401(k) perks, but their plan may have a hidden feature that allows for even more savings.<\/p>\n

When someone maxes out their 401(k) \u2014 $19,500 in annual contributions for those under 50 in 2021 \u2014 some plans may permit them to stash more money into their account.<\/p>\n

After-tax 401(k) contributions may let someone actually save up to $58,000 in 2021, including employer matches, profit sharing and other plan deposits.<\/p>\n

Later, investors may use a so-called mega-backdoor Roth maneuver, paying levies on after-tax earnings, to move the money into a Roth individual retirement account.<\/p>\n

"It can be a really really powerful technique for the right individual," said certified financial planner Dan Galli, owner at Dan J. Galli & Associates in Norwell, Massachusetts.<\/p>\n

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By rolling the money into a Roth IRA, investors may start building a tax-free pot of money for retirement, without rules to take the money out at a certain age.<\/p>\n

"If they're young enough and have years of tax-free growth ahead of them, it could be a game-changer," said JoAnn May, a CFP and CPA\u00a0with Forest Asset Management in Berwyn, Illinois.<\/p>\n

After-tax vs. Roth 401(k) contributions<\/h2>\n

It's easy to confuse after-tax 401(k) contributions with a Roth 401(k) account since both allow employees to save money after taxes, but there are significant differences.<\/p>\n

For example, employees under age 50 may defer up to $19,500 of their salary into their company's regular pre-tax or Roth (after-tax) 401(k) account.<\/p>\n

However, you can make additional after-tax contributions to your traditional 401(k), which allows you to save more than the $19,500 cap.<\/p>\n

For example, if someone defers $19,500 and their employer deposits $8,000 for matches and profit-sharing, they may save another $30,500 before hitting the $58,000 plan limit.<\/p>\n

The other twist is how earnings are taxed. While Roth 401(k) withdrawals (including earnings growth) are tax-free in retirement, any earnings on those "bonus" amounts are taxed. Yes, it's confusing.<\/p>\n

"That's why it's important to get [after-tax contributions] out of the 401(k) plan periodically," said May.<\/p>\n

Once per year, her clients withdraw after-tax contributions and earnings and roll the money into a pre-tax or Roth IRA. The downside of the Roth IRA option is there may be a tax bill on growth at the conversion.<\/p>\n

Keep in mind the feature isn't available for all plans.<\/p>\n

While many 401(k) offer Roth accounts, after-tax contributions are less common. Fewer than 20% of 401(k) plans provided after-tax contributions in 2019, Vanguard reported.\u00a0<\/p>\n

Moreover, plans with after-tax 401(k) contributions may not educate employees about the option. In some cases, advisors may discover the feature buried deep within a client's benefits paperwork.<\/p>\n

"The most important thing is to read your employee benefits handbook and pass it on to your advisor," said May.<\/p>\n

Taxable income in retirement<\/h2>\n

Whether someone leverages after-tax or Roth contributions, tax-free money may be valuable in retirement, said Galli.<\/p>\n

When clients apply for Social Security, their portfolio income may hurt those benefits. Retirees may pay income taxes on up to 50% to 85% of their Social Security payments, depending on their modified adjusted gross income.<\/p>\n

About 40% of those who receive Social Security income pay taxes on their benefits, according to the Social Security Administration.<\/p>\n

Some retirees may also pay more for Medicare premiums. While most retirees don't pay for Medicare Part A, the base price for Medicare Part B starts at $148.50 for 2021.<\/p>\n

Depending on their income, retirees may have to pay more for Medicare Part B, with top earners paying monthly premiums of $504.90.<\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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