This lesser-known 401(k) feature is a ‘no-brainer’ for big savers, advisor says


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If you’re itching to save more into your 401(k) for 2023, your plan may have a feature that allows you to bypass the yearly deferral limit.

For 2023, you can funnel $22,500 into your 401(k), plus an extra $7,500 if you’re 50 or older. But so-called after-tax contributions can exceed those limits. The max 401(k) limit for 2023 is $66,000, including employee deferrals, after-tax contributions, company matches, profit sharing and other deposits.  

After-tax contributions are a “no-brainer” if you make enough to comfortably save beyond the 401(k) employee deferral limit, said certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts.

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However, only 10% of employees with after-tax deferrals took advantage of the feature in 2022, and those who contributed typically had higher incomes and longer job tenure, according to Vanguard’s 2023 How America Saves report.

“There are many advantages — unless you need the money between now and retirement,” Galli said.

Still, many 401(k) plans don’t offer after-tax contributions due to plan design restrictions, he said. Indeed, only 22% of plans provided the option in 2022, according to the same Vanguard report.

Max out 401(k) deferrals first

Move the funds to ‘avoid taxation’ on growth

By doing this right, you can essentially avoid taxation on all growth, and that’s where the magic is.

Dan Galli

owner of Daniel J. Galli & Associates

Upon conversion, you’ll owe levies on after-tax contribution growth, which is why Galli suggests converting the funds to Roth accounts at least quarterly. “By doing this right, you can essentially avoid taxation on all growth,” he said. “And that’s where the magic is.”

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