Unlocking Hidden 401k Potential – Finger Financial Five #203

Unlocking Hidden 401k Potential

If you max out your 401(k) contributions yearly, and you are still able to invest beyond that, what should you do?

Many high earners find themselves in this situation, wondering how to maximize their tax-efficient savings beyond the usual limits.

Most people are familiar with two types of 401(k) contributions:

• Traditional 401(k): Contributions are made pre-tax, reducing taxable income today, but withdrawals in retirement are taxed at ordinary income rates.
• Roth 401(k): Contributions are made after-tax, meaning no tax break today, but withdrawals in retirement are tax-free.

For those under age 50, the total that you are allowed to put into those two accounts combined is $23,500 in 2025.

For those age 50-59, the total that you are allowed to put into those two accounts combined is $31,000 in 2025. (This limit also applies to those age 64+)

For those age 60-63, the total that you are allowed to put into those two accounts combined is $34,750 in 2025. (The current rules allow this age group to be eligible for a ‘super-catch up provision’)

So what if you are able to save more than those numbers above?

That is where another option can come into play. Some employers allow their employees to make ‘After-Tax’ 401(k) contributions. This may sound similar to ‘Roth’, but the rules differ.

Once you’ve reached the limits for maxing out your regular 401(k) contributions (Traditional and Roth), you can contribute additional money to an ‘After-Tax Bucket’ of your 401(k).

When considering your own regular contributions, the employer match, AND any ‘After-Tax’ dollars, the total yearly limit in 2025 for these accounts is $70,000. (Or even higher for those age 50+.)

When you retire, you can withdraw your original contributions from this ‘After-tax Bucket’ tax-free, but the problem is that the earnings in that bucket are subject to ordinary income taxes.

You may say: “My capital gains rate is lower than my ordinary income tax rate, so I’m better off putting those extra funds into a regular taxable account”.

Not necessarily.

If your employer allows this ‘After-Tax bucket’, they may ALSO allow you to convert your contributions to that bucket into a ‘Roth Bucket’. There are two ways this can happen:

1. A transfer of funds from the ‘After-Tax bucket’ to the ‘Roth 401(k) bucket’ via an ‘in-plan conversion’.

OR

2. A transfer of funds from the ‘After-Tax bucket’ to a Roth IRA via an ‘in-service rollover’.

Once the funds are in the ‘Roth Bucket’, the contributions AND the future earnings will be TAX-FREE when you withdraw them during retirement. Just be mindful about any earnings that occurred IN the ‘After-Tax Bucket’ PRIOR to converting these funds to the ‘Roth Bucket’ though.

How It Works in Real Life

• Cooper is 45 years old.
• He earns $170,000 per year.
• He only needs $100,000 of his salary and wants to save the rest.
• In 2025, he maxes out his standard 401(k) contributions at $23,500.
• His employer matches $6,500.
• That’s a total of $30,000 in his regular pre-tax 401(k) from his own contributions and the employer match.
• Because the overall contribution cap is $70,000, he still has room to add $40,000 in the  ‘After-Tax Bucket’.
• That $40,000 can be moved over to a Roth account, where future earnings will be tax-free.
•  He can repeat this process for years, potentially sheltering hundreds of thousands of dollars of his retirement money into the ‘Roth Bucket’.

This is really a big deal if done correctly. There are some nuances to how this all works though, and it may not be right for everyone. So we DON’T recommend trying this at home. Be sure to talk to your CPA or Financial Advisor to make sure you do it right.  

Some of you might be saying, this is too many numbers and buckets and details to follow. I hear you. We pay attention to all those details, so you don’t have to.