Huge savers can use this selection to high up their retirement

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Lots of people are aware of its 401 (k) perks, but their plan may have a hidden feature that allows for even more savings.

When someone hits their 401 (k) – $ 19,500 in annual dues for those under 50 in 2021 – some plans may allow them to keep more money in their account.

After taxing 401 (k) contributions, someone could actually save up to $ 58,000 in 2021, including employer matches, profit-sharing and other plan deposits.

Later, investors can use a so-called mega-backdoor Roth maneuver, levies on the after-tax profit, to transfer the money to an individual Roth pension account.

“This can be a really powerful technique for the right person,” said Dan Galli, certified financial planner, owner of Dan J. Galli & Associates in Norwell, Massachusetts.

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By pouring the money into a Roth IRA, investors can start building a tax-free cash pot for retirement with no rules to withdraw the money from a certain age.

“If they are young enough and have years of tax-free growth ahead of them, this could be a turning point,” said JoAnn May, CFP and CPA at Forest Asset Management in Berwyn, Illinois.

Post-tax vs. Roth 401 (k) contributions

It’s easy to confuse 401 (k) after-tax contributions with a Roth 401 (k) account, as both allow employees to save money after-tax, but there are significant differences.

For example, employees under the age of 50 can deduct up to $ 19,500 of their salary to their company’s regular pre-tax or Roth (after-tax) 401 (k) account.

However, you can make additional after-tax contributions on top of your traditional 401 (k), which can save you more than the $ 19,500 cap.

For example, if someone sets aside $ 19,500 and their employer pays in $ 8,000 for gaming and profit sharing, they may save an additional $ 30,500 before reaching the plan limit of $ 58,000.

If they’re young enough and have years of tax-free growth ahead of them, this could be a turning point.

JoAnn May

Financial planner at Forest Asset Management

The other twist is income taxation. While Roth 401 (k) withdrawals (including income gains) are tax-free at retirement, all income from these “bonus” amounts are taxed. Yes it is confusing.

“That’s why it’s important to get [after-tax contributions] regularly from the 401 (k) plan, “May said.

Once a year, your customers deduct post-tax contributions and income and roll the money into a pre-tax or Roth IRA. The disadvantage of the Roth IRA option is that a growth tax may be charged upon conversion.

Note that the feature is not available for all plans.

While many offer 401 (k) Roth accounts, after-tax contributions are less common. Less than 20% of the 401 (k) plans made after-tax contributions in 2019, Vanguard reported.

In addition, after-tax 401 (k) contribution plans may not be able to educate employees about the option. In some cases, advisors can discover the feature buried deep in a client’s performance papers.

“The most important thing is that you read your pension manual and pass it on to your advisor,” May said.

Taxable income in retirement

Regardless of whether someone uses after-tax or Roth contributions, tax-free money can be valuable in retirement, Galli said.

If clients apply for social security, their portfolio income may affect these benefits. Retirees can pay income taxes on up to 50% to 85% of their social security payments, depending on their modified adjusted gross income.

About 40% of those on social security income pay taxes on their benefits, according to the social security administration.

Some retirees may also pay more for Medicare premiums. While most retirees won’t pay for Medicare Part A, the base Medicare Part B price starts at $ 148.50 for 2021.

Depending on their income, retirees may have to pay more for Medicare Part B, with top earners paying monthly premiums of $ 504.90.

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