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Big savers may boost their retirement stash with this option


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

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

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.

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.

“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.

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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.

“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 with Forest Asset Management in Berwyn, Illinois.

After-tax vs. Roth 401(k) contributions

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.

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.

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

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.

If they’re young enough and have years of tax-free growth ahead of them, it could be a game-changer.

JoAnn May

Financial planner at Forest Asset Management

Taxable income in retirement

Whether someone leverages after-tax or Roth contributions, tax-free money may be valuable in retirement, said Galli.

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.

About 40% of those who receive Social Security income pay taxes on their benefits, according to the Social Security Administration.

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.

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


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