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When you’re keen to extend your retirement financial savings, a lesser-known 401(ok) characteristic may considerably increase your nest egg, monetary advisors say.
For 2025, you’ll be able to defer as much as $23,500 into your 401(ok), plus an additional $7,500 in “catch-up contributions” if you happen to’re age 50 and older. That catch-up contribution jumps to $11,250 for buyers age 60 to 63.
Some plans provide after-tax 401(ok) contributions on prime of these caps. For 2025, the max 401(ok) restrict is $70,000, which incorporates worker deferrals, after-tax contributions, firm matches, profit-sharing and different deposits.
When you can afford to do that, “it is a tremendous end result,” mentioned licensed monetary planner Dan Galli, proprietor of Daniel J. Galli & Associates in Norwell, Massachusetts.
“Typically, individuals do not consider it is actual,” he mentioned, as a result of you’ll be able to routinely contribute after which convert the funds to “flip it into tax-free earnings.”
Nonetheless, many plans nonetheless do not provide the characteristic. In 2023, solely 22% of employer plans supplied after-tax 401(ok) contributions, based on the newest information from Vanguard’s How America Saves report. It is most typical in bigger plans.
Even when it is accessible, worker participation stays low. Solely 9% of buyers with entry leveraged the characteristic in 2023, the identical Vanguard report discovered. That is down barely from 10% in 2022.
Tips on how to begin tax-free progress
After-tax and Roth contributions each start with after-tax 401(ok) deposits. However there is a key distinction: the taxes on future progress.
Roth cash grows tax-free, which implies future withdrawals aren’t topic to taxes. To match, after-tax deposits develop tax-deferred, which means your returns incur common earnings taxes when withdrawn.
That is why it is necessary to transform after-tax funds to Roth periodically, specialists say.
“The longer you permit these after-tax {dollars} in there, the extra tax legal responsibility there shall be,” Galli mentioned. However the conversion course of is “distinctive to every plan.”
Usually, you will must request the switch, which could possibly be restricted to month-to-month or quarterly transactions, whereas the very best plans convert to Roth routinely, he mentioned.
Give attention to common 401(ok) deferrals first
Earlier than making after-tax 401(ok) contributions, you need to concentrate on maxing out common pretax or Roth 401(ok) deferrals to seize your employer match, mentioned CFP Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina.
After that, money movement allowing, you may “begin filling up the after-tax bucket,” relying in your targets, he mentioned. “For my part, each greenback must discover a house.”
In 2023, solely 14% of workers maxed out their 401(ok) plan, based on the Vanguard report. For plans providing catch-up contributions, solely 15% of workers participated.