For Your Retirement Savings, Consider Going After-Tax
By: James Flippin · October 27, 2022 · Reading Time: 3 minutes
How Much Is Enough?
When it comes to saving for retirement, everyone is trying to hit the magic number. But it’s difficult to know exactly how big your nest egg will need to be, upon reaching retirement age — or what that age even is, in the wake of inflation.
One thing is for sure: Americans are consistent in believing it takes over $1 million to retire comfortably. A recent survey from Northwestern Mutual found this amount rose 20% on an annual basis. Similarly, while the expected retirement age checked in at 62.6 last year, that metric has now risen to 64.
Pushing Past the Limit
In 2022, individual taxpayers are permitted to defer up to $20,500 of their salary into a 401(k) retirement plan. People 50 and over are allowed an extra $6,500, given the closer proximity to retirement age. If you already hit that level and want to contribute more, some plans allow you to do so.
These are known as after-tax contributions. Utilizing money you have already paid income taxes on, you can go beyond the $20,500 amount. Some people choose to do this because money placed in 401(k) accounts grows on a tax-deferred basis. The taxes aren’t owed until you remove portions of the money, post-retirement.
Roth 401(k) and IRA
It’s important to note that after-tax contributions to traditional 401(k) accounts are not the same thing as a Roth 401(k), although both strategies offer a way to save money after taxes. In Roth accounts, there is no tax deferment when contributing to the fund, but distributions are not taxed. Each system has its advantages and disadvantages relative to an individual’s needs and goals.
Investors may also consider IRAs (individual retirement accounts) and Roth IRAs. It’s possible to roll your existing 401(k) plan over into a Roth IRA or Roth 401(k), although some taxes are due when that process is completed.
As with everything in finance, rolling a plan over into a Roth account doesn’t work for everyone and, in some cases, could work against you. But, for those looking to push past the tax-deferred limit, there are options.
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