One Question to Ask HR If You Are Already Maxing Out Your 401(k) Contributions

I recently spoke with a client interested in additional tax-saving options for retirement. She works for a large corporation and is currently contributing the IRS maximum amounts into her traditional 401(k) plan and Roth IRA. Since she is already maxing out her 401(k) plan and Roth IRA, she wanted to find out whether any additional tax-saving options were available. Once I gained a full understanding of her financial picture, I was able to point her towards a Mega Back Door Roth Strategy. For this strategy to work, there is one question that she had to ask her human resources department.

The Key Question
To explore this option, you first need to ask your HR department: Does the 401(k) plan allow after-tax contributions in addition to pre-tax or Roth 401(k) contributions? If the answer is yes, this strategy may be possible. If not, there are other approaches to consider.

How the Strategy Works
Let’s use an example to illustrate. Jane has already maxed out her 401(k), Roth IRA, and HSA contributions. She has extra cash flow and wants to save more in a tax-efficient way. By contributing to an after-tax account within her 401(k), she can create an additional savings bucket while keeping her pre-tax and Roth contributions intact.

Jane now has three buckets within her employer's 401(k): pre-tax contributions, employer matching contributions, and after-tax contributions. Each bucket grows over time, combining contributions with investment gains.

Rolling Over for Maximum Benefit

When Jane leaves her employer or retires, she can roll over her 401(k) balances:

• Pre-tax contributions and employer match → traditional IRA

• After-tax contributions → Roth IRA

• Growth on after-tax contributions → traditional IRA

This allows her to effectively increase her Roth IRA contributions beyond the standard limits while maintaining pre-tax 401(k) contributions.

In-Service Distributions Amplify the Strategy
If the plan allows in-service distributions, Jane can immediately roll her after-tax contributions into a Roth IRA each year. This enables the contributions to grow tax-free, rather than tax-deferred, potentially enhancing her long-term retirement savings.

Why It Matters
Even without in-service distributions, using after-tax contributions and a Roth rollover can have a meaningful impact on retirement balances. Understanding how to allocate contributions and growth between accounts can help clients maximize savings in a tax-efficient way.

Next Steps
If you are already maxing out retirement contributions and want to explore additional strategies, contact us to develop a plan tailored to your financial goals.