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Maximize Your 401(k) with Roth and After-Tax Dollars

By Ryan Glinn, CFP®, MBA,  CLTC®

You typically become eligible to participate in a company’s 401(k) or other retirement plan after one year of service. Determining how much you can afford to save is crucial. However, “where” you are saving is also important.

Roughly 70% of large and mid-size companies now offer a Roth provision.[1]  This allows you to save after-tax dollars that will grow tax-free and not be taxed after 59 ½. This tends to be most advantageous for young workers who have time on their side to capitalize on years of tax-free growth.

However, leveraging the Roth 401(k) may also makes sense for older individuals looking to diversify their tax types prior to retirement. This is common in more complex situations where legacy is likely and future Required Minimum Distributions from pre-tax 401(k)’s or Traditional IRA’s may force folks into a higher tax bracket.

Remember that the employer match will always be pre-tax and is usually subject to a vesting schedule.

Some 401(k) plans will also include an “after-tax” bucket that is separate from the Roth. Any contributions made to the after-tax portion will be tax free at withdrawal, but earnings will be taxed at ordinary income rates. The after-tax bucket is most utilized by high earners already maxing out their regular 401(k) contributions.

401(k) rules dictate that individuals can contribute a maximum of $19,500 ($26,000 if over age 50). However, that is specific to employee pre-tax and Roth contributions only. One can actually save a total of $58,000 ($64,500) between their Roth, pre-tax, after-tax and employer contributions. For example, a sixty-year-old that maxes out their pre-tax 401(k) with $26,000 and has no company match can save an additional $38,500 into the after-tax bucket.

The after-tax option is often used to leverage what is called the “Mega Backdoor” Roth. This is when you immediately convert your after-tax portion into the Roth bucket of your 401(k) or eventually out of the 401(k) plan altogether into a Roth IRA. However, not all 401(k)’s allow for the Mega Backdoor Roth and the steps involved can be quite complicated. It’s best to work with your plan administrator or financial advisor when executing this maneuver.

Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

The example(s) given are hypothetical and are for illustrative purposes. Actual results may vary from those illustrated

 This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.  The services of an appropriate professional should be sought regarding your individual situation.


[1] Kiplinger. https://www.kiplinger.com/article/retirement/t001-c032-s014-3-great-reasons-for-after-tax-401k-contributions.html

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