Here’s how to make after-tax 401(k) plan contributions for 2023

If you’re on track to maximize your 401(k) plan for 2023 and want to save even more, your plan may have another option: post-tax contributions.

For 2023, you can defer up to $22,500 into a 401(k), and savers age 50 or older can add another $7,500. Some plans allow more through after-tax 401(k) contributions.

Keep in mind that the plan’s total limit for 2023 is $66,000, which includes your deferrals, company matching, profit sharing and other deposits from your employer.

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An estimated 14% of employees maxed out on a 401(k) plan in 2021, According to Vanguardbased on 1,700 plans and nearly 5 million participants.

After-tax 401(k) contributions may be worth considering if you’re a higher earner looking for more ways to save, explains Ashton Lawrence, a certified financial planner and partner at Goldfinch Wealth Management in Greenville, South Carolina.

After-tax 401(k) contributions are different from Roth 401(k) savings. While both involve deferring a portion of your after-tax paycheck, there are some key differences.

For 2023, if you’re under 50, you can defer up to $22,500 of your paycheck to your plan’s regular pre-tax account or a Roth 401(k) account. The percentage of plans that offer a Roth 401(k) savings option has risen over the past decade.

However, some plans make additional after-tax contributions to your traditional 401(k), allowing you to save more than the $22,500 cap. For example, if you defer $22,500 and your employer kicks in $8,000 for matches and profit sharing, you can save another $35,500 before you reach the plan’s $66,000 limit for 2023.

While the number of plans making after-tax 401(k) contributions is on the rise, they’re still less common among smaller companies, according to an annual survey from the Plan Care Council of America.

In 2021, nearly 21% of company plans made after-tax 401(k) contributions, compared to about 20% of plans in 2020, the survey found. And nearly 42% of employers of 5,000 or more offered the option in 2021, up from about 38% in 2020.

And the same survey showed that, despite a slight uptick, after-tax 401(k) participation declined in 2021, dropping to about 10% from about 13% the year before.

Once you make post-tax contributions, the plan may allow for what’s known as a “huge back door Roth” strategy, which involves paying taxes on growth and moving money around for future tax-free growth.

“It’s a good way to move forward and start increasing tax-free money for those years ahead,” Lawrence said.

Depending on the plan’s rules, you can transfer the money to a Roth 401(k) within the plan or to a separate Roth individual retirement account, explains Dan Galli, CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with so many details to consider, working with a counselor can be beneficial.

However, “there are quite a few professionals — CPAs, lawyers, wealth managers and financial planners — who don’t understand or aren’t familiar with the Roth plan. [401(k)] He said.

While the “quick reaction” is to roll over post-tax 401(k) funds from the plan into a Roth IRA, investors need to know the rules and potential downsides, such as losing access to institutional pricing and funds, Galle said.

He said, “There is no right or wrong.” “It’s just an understanding of the benefits, and my impression is that most people don’t understand that you can do all of this in a 401(k).”