What is the After-Tax 401(k)? (And Should Everyone Take Advantage?)
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What is the After-Tax 401(k)? (And Should Everyone Take Advantage?)
Retirement planning can often be an intimidating and complex process, with various investment options and strategies to consider. One such option that may not be well-known to many people is the after-tax 401(k). This article aims to shed light on what the after-tax 401(k) is and whether everyone should take advantage of it.
To understand the after-tax 401(k), it is essential to first grasp the concept of a traditional 401(k) plan. A traditional 401(k) is an employer-sponsored retirement account that allows employees to contribute a portion of their pre-tax income towards retirement savings. These contributions are not taxed until the funds are withdrawn during retirement.
On the other hand, an after-tax 401(k) allows employees to contribute additional funds to their retirement savings beyond the limits of a traditional 401(k). While the contributions to a traditional 401(k) are limited by an annual IRS maximum, the after-tax 401(k) enables individuals to save above and beyond this limit, albeit without receiving any upfront tax deduction.
The main advantage of the after-tax 401(k) lies in the tax treatment of the funds when they are withdrawn. While the contributions are made with after-tax dollars, any growth within the account is tax-deferred. Upon retirement and withdrawal, this growth is subject to ordinary income tax, whereas the after-tax contributions themselves are tax-free.
So, who should consider taking advantage of the after-tax 401(k)? The answer depends on certain factors. Firstly, individuals who have maximized their contributions to a traditional 401(k) should explore after-tax 401(k) options as a means to further boost their retirement savings. It allows them to achieve higher overall contribution limits, taking advantage of potential tax-deferred growth.
Secondly, those who anticipate a higher tax rate during retirement could benefit from an after-tax 401(k). By making after-tax contributions now, they can potentially withdraw funds at a lower tax rate in the future. This strategy is particularly useful for younger employees who have more time for their investments to grow.
Additionally, individuals who have exhausted other tax-advantaged retirement savings options, such as an individual retirement account (IRA) or a Roth IRA, may find the after-tax 401(k) an attractive opportunity for additional savings.
However, it is important to note that after-tax 401(k) plans are not offered by all employers. Large companies are more likely to provide this option, as it requires additional administrative processes and complexity compared to a traditional 401(k). Therefore, not everyone may have access to an after-tax 401(k), depending on their employer’s retirement plan offerings.
In conclusion, the after-tax 401(k) can be a valuable tool for certain individuals looking to maximize their retirement savings. It allows for additional contributions beyond the limits of a traditional 401(k), and the tax-deferred growth potential can offer significant advantages. However, the decision to take advantage of this option depends on individual circumstances, such as already maximizing traditional 401(k) contributions and anticipating future tax rates. As always, consulting with a financial advisor is recommended to determine the best retirement savings strategy based on personal goals and circumstances.
Great show. A lot of good information but the guy on the left is annoying af to listen to. Shut up with the fluff and get to the information we are looking for.
iam saving for down payment for home what should I do with my 401k
Any recommendations for accidentally violating the order of contributions? I contributed after tax dollars before maxing out pretax contributions.
With an initial startup up of $6000 in stocks and ETFs, I can boast of solid 5 figures in my account after 7 months of compounding profits
Is this in-service Roth conversion only for converting after-tax $ from 401k to Roth 401k only?
Or… does it also apply to converting after-tax $ from 401k to (outside) Roth IRA?
Some good information about after tax investing.
Why if there's a dollar amount cap on how much you can contribute is there also a maximum of 20 percent income? Why can't I do more than 20 percent into my 401k if it doesn't exceed the 19500
My employer allows same day in plan Roth conversion, which is a great way to add Roth cost basis.
We use Fidelity and I use After Tax for the money beyond the $19K limit across Pre-Tax and Roth 401K plans.
After each contribution into After Tax, Fidelity converts it into Roth and puts it in the Roth bucket. If you have Fidelity, this is a great boon to build tax-advantaged retirement/Roth money.
Now I need to contact our administrator. I wasn’t aware the gains might be taxed in our Roth 401k. Fortunately I get the match
Doesn't appear that you directly answered "Should someone not maxing out 401k, be using the after-tax?". The answer is no because he could be using the Roth 401k option before the employee contribution limit has been met. He can then switch to using the after-tax option.
Mega back door roth FTW
This video came right on time, my husband is about to start contributing to his after tax 401k. His company allows him to contribute 20% of his net income.
I sold some long term capital gains stocks this year to lock in the 15% gain before the rates change with Biden. I upped my after tax 401k to do an in kind contribution to the Roth 401k. We can do 2 conversions per year at work. I also maxed my 401k and ira Roth.