Have a 401(k)? Here’s a Secret Retirement Plan You Probably Don’t Know About

Worker with a briefcase full of cash
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Have you reached the ceiling on your annual 401(k) contributions? Although you might not realize it, some workplaces make it possible to push up the roof a bit higher.

More employers are offering the option of after-tax contributions to 401(k) plans, and that can raise the amount you are allowed to put away for retirement to as much as $61,000 annually.

That compares with the standard pre-tax contribution limit of $20,500, plus a catch-up contribution of $6,500 for those who are age 50 or older.

About 21% of companies with 401(k) plans now offer the option of after-tax contributions, according to Vanguard. That number has steadily risen from 17% in 2017.

People who use the after-tax feature to contribute to their 401(k) often do so with the intention of rolling the money over into a Roth IRA, thereby boosting the pot of tax-free money they can draw on in retirement.

Are after-tax contributions the right option for you? Possibly. But there are other strategies that might work out better.

For example, some experts think you are better off keeping the money in a taxable account. That’s because the tax rate on long-term capital gains in a taxable account is currently set at a relatively low 20%.

Compare that to the higher ordinary income tax rates — which top out at 37% — that you could owe on the gains of after-tax contributions when you withdraw them or roll them over.

Still, there are people for whom making after-tax contributions is a great option. So, before you decide, stop by the Money Talks News Solutions Center and find a financial adviser who can discuss the pros and cons of making after-tax contributions to a 401(k) plan.

How to learn more about money

The decision about whether to make after-tax contributions is a complicated one. But you can make it easier by learning a few money basics.

In the Money Talks News course Money Made Simple, MTN founder Stacy Johnson offers 14 weeks of lessons that can improve your financial life in all the following areas:

  • Budgeting
  • Banking
  • Credit
  • Taxes
  • Insurance
  • Investing
  • Real estate
  • Estate planning

After finishing these lessons, you will be ready to manage money more efficiently while spending less time getting the results you want. As Stacy writes:

“Whatever your situation, understanding and learning to control your money is going to improve your life. If you’re rich, you want to stay that way. If you’re not, you want to get that way.”

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