How to Save Above 401(k) Deferral Limits with After-Tax Contributions

If you’ve already maxed out your 401(k) plan contributions for 2022 and you’re eager to save more for retirement, some plans have an under-the-radar option, experts say.

For 2022, you can defer $20,500 to a 401(k), plus an additional $6,500 for investors 50 and older. But the total plan limit is $61,000 per worker, including matches, profit sharing and other contributions. And some plans allow you to exceed the $20,500 deferral limit with so-called after-tax contributions.

“It̵[ads1]7;s definitely something higher-income people might want to consider at the end of the year if they’re looking for places to put extra savings,” said certified financial planner Ashton Lawrence, a partner at Goldfinch Wealth Management in Greenville, South Carolina.

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After-tax contributions are different than Roth 401(k) plans. While both strategies involve saving money after taxes, there are some important differences.

For 2022, if you’re under 50, you can put up to $20,500 of your salary into the plan’s regular pretax account or Roth 401(k) account. The percentage of plans that offer a Roth 401(k) savings option has increased over the past decade.

However, some plans offer additional after-tax contributions to your traditional 401(k), allowing you to save more than the $20,500 limit. For example, if you defer $20,500 and your employer kicks in $8,000 for matches and profit sharing, you could save another $32,500 before reaching the plan limit of $61,000 for 2022.

While the number of plans offering after-tax 401(k) contributions has increased, it remains less common among smaller companies, according to an annual survey by the Plan Sponsor Council of America.

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

Despite the increase, after-tax 401(k) participation fell in 2021, falling to about 10% from nearly 13% the year before, the same survey found.

Once you’ve made after-tax contributions, the plan can allow for what’s known as a “mega backdoor Roth” strategy, which includes paying taxes on growth and moving the funds for future tax-free growth.

“It’s a great way to go forward and start growing that tax-free money for future years,” Lawrence said.

Depending on plan rules, you can transfer the money to a Roth 401(k) within the plan or to a separate Roth individual retirement account, explained Dan Galli, a CFP and owner at Daniel J. Galli & Associates in Norwell, Massachusetts. And with many details to consider, it may be worth working with an advisor.

But “there are a large number of professionals—from CPAs, attorneys, wealth managers and financial planners—who don’t understand or aren’t familiar with the Roth in the plan. [401(k)] rollovers,” he said.

While the “knee-jerk reaction” is to roll after-tax 401(k) funds out of the plan into a Roth IRA, investors need to “know the rules” and possible downsides, such as losing access to institutional rates and funds, Galli said.

“There is no right or wrong,” he said. “It’s just understanding the benefits, and my impression is that most people don’t understand that you can do everything within the 401(k).”