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  • If you want to contribute as much as possible to your 401(k), some plans have a special feature to save over the annual deferral limit.
  • About 20% of company plans offered after-tax 401(k) contributions in 2021, according to the Plan Sponsor Council of America.
  • You can use after-tax 401(k) deposits to start a “mega backdoor Roth” strategy that involves paying taxes on growth and rolling funds over for future tax-free growth.

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If you want to contribute as much as possible to your 401(k), some plans have a special feature to save over the annual deferral limit.

The 2023 deferral limit for 401(k) plans is $22,500, plus an additional $7,500 if you’re age 50 or older. But an under-the-radar option known as an after-tax 401(k) contribution allows you to save up to $66,000, including employer matches, profit sharing and other plan contributions.

For those looking for tax-efficient ways to boost retirement savings, “it’s just a great opportunity,” says certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts.

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However, most 401(k) plans still don’t offer after-tax payouts because of strict plan design laws, Galli said. But it’s more common among larger companies.

In 2021, roughly 21% of company plans offered after-tax 401(k) contributions, compared with about 20% of plans in 2020, according to an annual survey by the Plan Sponsor Council of America. And nearly 42% of employers of 5,000 or more provided the opportunity in 2021, up from about 38% in 2020.

However, employees who have the ability to make after-tax 401(k) contributions may not take advantage because of “cash flow issues,” Galli said.

Only about 14% of workers outgrew a 401(k) plan in 2021, according to Vanguard, based on 1,700 plans and about 5 million participants.

Another benefit of after-tax 401(k) contributions is that you can use the funds to complete a so-called mega-backdoor Roth strategy, paying taxes on the earnings and moving the money into a Roth account for future tax-free growth.

By rolling the money into the same plan’s Roth 401(k) or Roth separate retirement account, you can start building tax-free money that won’t incur charges on future withdrawals.

“It’s totally worth it,” says Linda Farinola, CFP and enrolled agent at Princeton Financial Group in Plainsboro, N.J., noting that tax-free withdrawals can be helpful in retirement.

When it comes time to withdraw money, these accounts won’t boost adjusted gross income, which could trigger other tax consequences, such as Medicare Part B or D premiums, he said.

Of course, you’ll want to take advantage of your employer’s 401(k) match — pretax or Roth 401(k) deferrals — before making after-tax contributions, Farinola said.

The most common 401(k) match is 50 cents per dollar of employee contributions, up to 6% of compensation, according to the Plan Sponsor Council of America. However, millions of Americans delay enough to receive the full company match.

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