There are yearly caps on how much may be put into retirement plans that offer tax advantages. A 401(k) account is a great place to save for your future, but did you know you can put away even more money by making contributions after taxes have already been taken out? Money put into a 401(k) after taxes is money that has already been taxed. Similarly to Roth 401(k) contributions, they can significantly boost your retirement savings if your company's plan permits them.

What's an After-Tax 401(k)?

If your company offers a 401(k) plan but wants to save more than the yearly maximum, you can contribute after-tax funds. Your 401(k) account will grow tax-deferred whether you make pre-tax or after-tax contributions. You will only be required to pay taxes on the earnings produced from your retirement savings after you begin withdrawing money from them in retirement.

Can I Make 401(k) Payments After Taxes Have Been Taken Out?

After-tax contributions to a Roth 401(k) are made after the yearly maximum on pre-tax contributions has been met. Here's how after-tax donations work; however, not all companies provide them. Let's pretend you're 35 years old, make $125,000 a year, and put the maximum $22,500 into your 401(k) plan before taxes.

If your company matches up to 3% of your income, that's an additional $3,750, for a total of $26,250. The maximum yearly 401(k) contribution for 2023 is $66,000, but if your plan permits after-tax 401(k) contributions, you might save an extra $39,750.

2019 401(k) Roth Contribution Limits After Taxes

For 2023, the IRS significantly increased the maximum amount that may be contributed to a 401(k) plan by retirement savings. In 2023, 401(k) participants can earn a maximum of $66,000. The pre-tax ceiling is only $22,500, so this is a massive increase above that.

The pre-tax cap for 401(k) contributions in 2022 were $20,500, bringing the total limit to $61,000. In 2023, Americans aged 50 and over can contribute an extra $7,500 to their 401(k)s. In 2023, they can put in up to $73,500.

Tax Advantages of 401(k) Investments

Regarding retirement savings, it's easier to match the benefits of making after-tax contributions if you're a high worker with extra money.

Tax-Deferred Accumulation

A 401(k) allows you to contribute money you already paid taxes on and watch it grow tax-free until you withdraw it in retirement.

Risk of Capital Gains Exclusion

Retirement savings in a taxable investment account grow tax-free, just like after-tax 401(k), contributions do. However, earnings in a taxable account are subject to capital gains taxes, which can reach 37% for assets held for less than a year.

Suppose you contribute to a 401(k) plan after taxes. In that case, you'll only have to pay regular income tax on investment gains, which may add to significant savings because most individuals anticipate a lower tax rate in retirement.

Options for Withdrawal

Unlike conventional 401(k) contributions, which require you to wait until age 59 12 for penalty-free withdrawals, after-tax 401(k) contributions can be withdrawn at any time without penalty.

Consequences of 401(k) Investments Made After Taxes

Even for high incomes with enough cash to spare, there are drawbacks to making after-tax contributions to a 401(k).

Investing Choices Are Slim

After-tax contributions to a 401(k) will provide you with fewer investment options than if you roll those funds into a Roth IRA since most 401(k) plans come with a restricted set of investment options.

Confined Supply

Unfortunately, just 21% of 401(k) plans allow after-tax contributions, according to research by the Plan Sponsor Council of America. Increasing your savings rate may not be possible with your current strategy.

Can I Contribute To Two After-Tax 401(k)s?

Another 401(k) or several 401(k) plans allow you to make after-tax contributions. Remember that in 2022, employees can contribute up to $20,500, and those 50 and over can contribute up to $27,000.

If you are self-employed and eligible to enroll in a solo 401(k) or profit-sharing plan, you can make additional employer contributions on top of the standard employee contribution. In 2022, the most you may put into your 401(k) from your company and your paycheck will be $61,000, or $67,500 if you're 50 or older.

The Bottom Line

If you want to save more money every year in a tax-advantaged retirement account and retire sooner, an after-tax 401(k) is a terrific option. If you use a 401(k) for tax purposes, you should verify that the plan's investment options suit your situation.