How To Contribute Up To An Extra $37,500 To Your 401K And Have It Be Tax Free Forever | EXTRA Money In Your Retirement Portfolio

Troy Sharpe:

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, CERTIFIED FINANCIAL PLANNER™ Professional (CFP®), and host of The Retirement Income Show. Most people think with their 401K, that the most we can put in if we’re greater than 50 is $26,000. This is your 19,500 contribution plus what’s called a catch-up contribution, which gets you to this 26,000. If you’re younger than 50, the most you can put in is 19,500 and take a deduction for it, but that’s not the maximum amount of money you can put into your 401K. Most of us, if we’re in the point of our career where we’re making good income, we max out our 401K contribution to take the deduction, most of us just take that extra income and put it into the bank account.

Now that’s a mistake because you can put, if you’re younger than 50, up to $57,000 into your 401K. If you’re over 50, up to 63,500 into your 401K. I’m going to focus here on the over 50 because that’s going to be most of you who fall into this situation. If you put 63,500 into your 401K, 26,000 of it is deductible. The remaining portion will go into the after-tax part of your 401K. Here’s the cool part. When you retire or leave your employer, we can take all of those after-tax contributions and roll them into a Roth IRA. That money inside the Roth will grow and be tax-free forever. We can have tax-free income in retirement, tax-free growth. Very, very powerful tool.

When we make these contributions, the interest that we earn on these contributions, the interest will have to roll over to a normal IRA upon retirement. You can’t roll those earnings on your after-tax contributions into the Roth without paying tax on them, but your after-tax contributions, the difference between the maximum, this is for 2020, and the deductible, that’s your after-tax contribution. Those contributions, all of them, for every year, can roll into a Roth IRA upon retirement, and they’ll grow tax-free forever. Now, your matching contribution from your employer, that will still go into the pre-tax part. We have to roll that into an IRA whenever you retire.

One thing to add here is most employers do allow this, the IRS absolutely does, these are the IRS limits, but not all employers will allow you to put these after-tax contributions, and most of them do. Talk with your HR manager, talk with the 401K administrator, see if you can put after-tax contributions into your account. Then thanks to a 2014 revenue ruling from the IRS, we are now allowed to take these after-tax contributions, roll them into a Roth IRA, and you can have tax-free growth and income for the rest of your life.

If you have questions about this, if you need help with this or want a consultation, there’s a link in the description below. You can click that to reach out to us. We’re always here for you to help you stay more connected to your money and make better decisions so you can keep more of your money in your pocket and less in Uncle Sam’s. Make sure to share this video with a friend or family member. This is powerful information. Hit the thumbs up button, hit the Subscribe, and we’ll see you in the next video.