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Navigating Retirement Savings: Understanding Traditional 401(k), Roth 401(k), and After-Tax Accounts

Navigating Retirement Savings: Understanding Traditional 401(k), Roth 401(k), and After-Tax Accounts

November 29, 2023

Saving for retirement is a crucial aspect of financial planning, and employer-sponsored retirement plans offer employees various options to build a secure financial future. Three common types of retirement accounts provided by employers are the Traditional 401(k), Roth 401(k), and After-Tax account. Each comes with its own set of rules, tax implications, and contribution limits. In this article, we will explore the differences between these accounts, with a focus on the contribution limits for the year 2024.

  1. Traditional 401(k):
    • Contribution Limits: In 2024, the contribution limit for employees participating in a Traditional 401(k) is $23,000. Additionally, individuals aged 50 and above can make catch-up contributions of up to $7,500.
    • Employer Contributions: Employers may offer matching contributions or profit-sharing contributions to augment the employee's savings.
    • Tax Treatment: Contributions to a Traditional 401(k) are made with pre-tax dollars, meaning they reduce taxable income in the year of contribution. However, withdrawals during retirement are subject to income tax.
  2. Roth 401(k):
    • Contribution Limits: Like the Traditional 401(k), the annual contribution limit for a Roth 401(k) in 2024 is $23,000, with an additional catch-up provision of $7,500 for individuals aged 50 and above.
    • Tax Treatment: Contributions to a Roth 401(k) are made with after-tax dollars, meaning they do not provide an immediate tax savings. However, qualified withdrawals during retirement, including earnings, are tax-free.
    • Employer Contributions: Employer contributions are the same as Traditional 401(k)
  3. After-Tax Account:
    • Contribution Limits: The annual limit on total contributions to defined contribution plans, including both employee and employer contributions, is $69,000 in 2024.
    • Utilization: After-Tax accounts provide an avenue for employees to contribute beyond the limits of Traditional and Roth 401(k)s. Employees can contribute additional funds after maxing out their pre-tax and Roth contributions.
    • Tax Treatment: Contributions to an After-Tax account are made with after-tax dollars, similar to a Roth account. However, the earnings on these contributions are subject to taxation upon withdrawal. The contributions can be taken out tax free at any time as a return of principal.
    • Rolling Over to Roth IRA: One strategy is to periodically convert After-Tax account contributions to a Roth IRA, allowing for tax-free growth and withdrawals in retirement.

As the contribution limits for defined contribution plans increase, individuals have a unique opportunity to bolster their retirement savings. By strategically utilizing employee elective deferrals, employer contributions, and after-tax accounts, individuals can make the most of the annual additions limit. Additionally, the benefits of after-tax contributions, such as tax diversification and potential conversion to a Roth IRA, add layers of flexibility to retirement planning. It's essential for individuals to understand their retirement plan’s features.  It is advisable to consult with a qualified financial advisor who can provide personalized guidance based on individual circumstances and guide you to make informed decisions to secure a comfortable and financially sound retirement.

The information provided in this article is for educational purposes only and is not intended to be construed as financial advice. It is derived from sources believed to be true. Any discussion of tax treatment is incidental to my role as a licensed Investment Advisor Representative and should be treated as such.

Ben M. Bouman . Alpine Financial Partners . Investment Advisor Representative . bbouman@ceteraadvisors.com

(505) 500-8420 office . 2610 Trinity Drive #10 . Los Alamos, NM 87544 . www.alpinefinancialpartners.com

Securities and Advisory Services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker/dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.