If you're eager to boost retirement savings, your 401(k) may offer after-tax contributions. Here's what investors need to know.
However, most 401 plans still don't offer after-tax contributions due to strict plan design laws, Galli said. But it's more common among bigger companies.
In 2021, roughly 21% of company plans offered after-tax 401 contributions, compared to about 20% of plans in 2020, according to an annual survey from the Plan Sponsor Council of America. And almost 42% of employers of 5,000 or more provided the option in 2021, up from about 38% in 2020. Still, employees who do have the chance to make after-tax 401 contributions may not take advantage due to "cash flow issues," Galli said., based on 1,700 plans and nearly 5 million participants.Another perk of after-tax 401 contributions is you can use the funds to complete the so-called mega-backdoor Roth strategy — paying levies on earnings and moving the money to a Roth account — for future tax-free growth.
By rolling the money into the same plan's Roth 401 or a separate Roth individual retirement account, you can start building a pot of tax-free money, which won't trigger levies upon future withdrawal.
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