How To Fund Your 401K Faster
The most any one individual under 50 can contribute to their 401K in a year is $20,500, however, you can get around this by contributing after-tax money, too.
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As we near the end of the year, you may be looking at ways to maximize your retirement savings. If you have diligently contributed to your 401k, you may have maxed out your annual contribution allotment. But, experts say they have good news – there is a way around this roadblock.
The annual maximum contribution any individual is allowed to make may hamper your savings goals. It is especially true if your benefits package includes employer-contributed funds. Some companies even match your set contribution to a certain percentage point or dollar amount.
And for 2022, the maximum amount you can squirrel away into your 401k is $20,500. However, if you are 50 or older, you can add an additional $6,500. The IRS does not allow more than $61,000 annually, including profit sharing or matches.
So what are your options if you happen to defer your limit of $20,500 in 401k contributions but still want to save more in the last few months of the year? CNBC spoke with some financial experts about this very topic. And they found some information that may help.
One option is a lesser-known avenue in which you contribute after-tax money. According to Ashton Lawrence, a certified financial planner, and partner at Goldfinch Wealth Management, “It’s definitely something higher-income people may want to consider at the end of the year if they’re looking for places to put additional savings.” Of course, this will only work if you have not exceeded your total annual contribution of $61,000.
The only problem is that this savings avenue is still not widely available. Each plan varies slightly, and not all offer an after-tax option. As of 2021, approximately 21% of companies have retirement plans that allow after-tax contributions to a 401k.
And the worse news is that most employees do not appear to know about this route. Only about 10% of employees opted for after-tax contributions to their 401k. So, additional education around retirement savings plans may be in order.
However, the after-tax route some 401k plans offer is not the only alternative to the traditional path. Another avenue is Roth 401k plans. This option also involves saving money after taxes.
Or, if you would like, you can combine both options. There are ways to transfer your after-tax contributions to a Roth 401k. But, most financial experts would caution you to seek a financial advisor before diving in too deeply there.
Moving that after-tax money between the accounts involves nuances and factors worth considering. And according to the owner at Daniel J. Galli & Associates, Dan Galli, “there’s a fair number of professionals — from CPAs, attorneys, wealth managers and financial planners — who don’t understand or are not familiar with in-plan Roth [401(k)] rollovers.” So find someone who has experience working with this scenario.
If you can find a financial advisor you trust with this nuanced work, it will pay off in dividends. Lawrence believes “that’s a nice way to go ahead and start boosting that tax-free money for those future years.” And that is very welcome news indeed.
