When it comes to 401(k) plans, you may be missing out on benefits that you don’t know about.
Your 401(k) plan doesn’t have to offer all the tax-savings provisions that the IRS allows for 401(k) plans. So, not all plans have every possible 401(k) feature, which means there may be perks you don’t realize exist.
The only way to find out what options your 401(k) offers is to ask your plan or your employer.
Not sure where to start? The following are some little-known 401(k) provisions to be aware of.
1. A Roth option
Here’s a great secret: the Roth 401(k). This type of tax-advantaged account is much like a traditional 401(k), but one key difference is that you contribute post-tax dollars rather than pre-tax dollars to Roth accounts.
So, contributions to Roth accounts are not tax-deductible, but they grow tax-free and can be withdrawn tax-free in retirement.
On the other hand, contributions to traditional accounts are tax-deductible in the tax year for which they are made, but contributions and earnings are taxable in the year in which you withdraw them.
“Roth 401(k) provisions are my favorite when offered. They combine the best features of Roth accounts and 401(k),” says Gordon Achtermann of Your Best Path Financial Planning in Fairfax, Virginia.
For 2021 you can only contribute up to $6,000 or $7,000 to a Roth individual retirement account (IRA), depending on your age. But the contribution limit for a Roth 401(k) is the same as that for a traditional 401(k): $19,500 or $26,000, depending on age.
Last year, we broke this down further in “Few Retirement Account Limits Will Rise Next Year.”
You may be able to roll an old 401(k) plan from a former employer into your current 401(k), basically meaning moving the money from your old 401(k) into your new one.
But first, ask your current employer about the particulars, says Mari Adam, a certified financial planner who works with Mercer Advisors in Boca Raton, Florida.
“You really need to do your homework,” Adam tells Money Talks News. “The boss gets to make the rules.”
Of course, even if rolling an old 401(k) into a new one is a good option for you, it’s not your only option. Another is to roll your old 401(k) into an IRA — which might be the better option for reasons we outline in “5 Reasons You Should Move an Old 401(k).”
You should do everything in your power to avoid borrowing money from any retirement account — most important is building an emergency fund so you can use that money instead of going into debt when you fall on tough times.
“But if you’re desperate, if you need money, it’s better than a credit card at 22%,” Adam says of 401(k) loans.
Even if you truly have no other option than to borrow against your golden years, know that it could cost you more than you realize upfront.
The interest you pay on a 401(k) loan goes back to your own 401(k) account, so there’s technically no loss for you there. But there is an opportunity cost for the principal that you borrow.
You will lose out on however much money the principal could have earned from long-term market gains had you never withdrawn it from your 401(k) early for a loan.
And that’s just one pitfall of 401(k) loans. Money Talks News founder Stacy Johnson details several others in “Ask Stacy: Should I Borrow From My Retirement Account to Pay Debts?”
4. Advice from a professional
Can you get advice from a professional about managing your 401(k) plan? The best plans offer access to such a pro, says Justin Pritchard, a certified financial planner at Approach Financial Planning in Montrose, Colorado.
He explains to Money Talks News:
“How much should you save to reach retirement goals? Which investments might be appropriate for you? Those are crucial questions when somebody enrolls in a 401(k) plan, but some plan providers (and employers) leave you on your own. If you can talk to a fiduciary CFP who can give advice in your best interests, you improve the chances of employees reaching their goals successfully.”
If you need or want to consult a fiduciary professional — one who is bound to put your best interest before his or her own wallet — but you don’t have access to one through your 401(k), one easy option is Money Talks News partner Wealthramp. This free referral service can help you find vetted independent, fiduciary financial advisers in your area.
5. After-tax contributions
While you contribute pre-tax dollars to a traditional 401(k), you might also be able to make after-tax contributions once you contribute the maximum allowed amount of pre-tax dollars.
“A 401(k) secret that people should be aware of is the ability to contribute after-tax dollars to your 401(k),” says Aaron Parrish, a certified financial planner at Level Wealth Management in Greensboro, North Carolina. “Not all 401(k)s allow this because it is determined by the employer.”
Another secret: This could also essentially enable you to put more money into a Roth IRA — even if you earn too much income to be eligible to contribute to a Roth IRA, Parrish tells Money Talks News.
“Theoretically, a high income earner could max out their pretax contributions and then contribute after-tax dollars to their 401(k) up to the combined employee/employer contribution limit of $56,000, or $62,000 if 50 or older. Once they [leave their employer], the after-tax portion of their 401(k) can be rolled into a Roth IRA.”
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