Alternatively, if your plan allows and depending on if your employer contributes or not, you may be able to contribute up to another $38,500 to your after-tax voluntary 401(k). After-tax voluntary contributions have already been subject to income tax.Įmployees can contribute up to $19,500 (plus a $6,500 catch-up contribution if over 50) in total to the pre-tax and/or Roth portion of the 401(k) in 2021. Some employer retirement plans allow employees to make three types of contributions 1) pre-tax, 2) Roth, and 3) after-tax voluntary.
After-tax Voluntary Contributions to Work Retirement Plans You don’t get a current-year tax deduction for the money deposited after tax and then converted to a Roth 401(k), but the funds grow and are distributed tax-free as long as you hold the account until the age of 59.5 or 5 years, whichever is longer. And most importantly, you love TAX-FREE money for your retirement!Īt a fundamental level, converting after-tax voluntary 401(k) money to a Roth 401(k) allows employees to save significantly more, tax-free, for retirement.You don’t want the hefty tax bill of a taxable conversion of pre-tax to Roth.You make too much to contribute to a Roth IRA but still want to save Roth dollars for your retirement.You have a fully-funded emergency fund, a reasonable debt situation, and do not need the liquidity.
Your plan allows the after-tax voluntary contributions into a separate account, and you want to save more than the pre-tax/Roth 401(k) contribution 2021 limit of $19,500 or $26,000 if you’re over 50 years old.When is it a good idea to contribute to an after-tax voluntary 401(k) and convert to a Roth 401(k)? Here are some factors to evaluate if you are considering this strategy: If your employer’s plan allows, this strategy will enable you to convert after-tax voluntary 401(k) contributions to a Roth 401(k).
One strategy we have seen become increasingly popular is the backdoor Roth conversion through an employer’s work retirement plan.
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