I’ve been running this blog for 10 years now and as much as I hope it’s been helpful to you in terms of personal finance education; it’s also been really helpful to me. While running this blog I’ve been fortunate to hit all sorts of financial milestones: buying a house, getting a promotion, getting a new job, having kids, maxing out a 401(k), losing money on crypto, participating in an ESPP, getting RSUs, and becoming a landlord. Personal finance is a journey and we’re each on our own journeys!

One thing that I’ve been trying to practice recently is talking and sharing more about little tips and tricks we’re all learning. Each of us are doing cool things and learning unique things on our own journeys and I’ve recently hit the point on my journey to try something new cool financially: save more for retirement than the $22,500 current limit for 2023 set by the IRS.

It is not my intent for this article to come off as bragging about how much I can save for retirement when you might be on a different part of your journey where saving anything for retirement seems like a stretch. There are all sorts of tips and tricks (‘loopholes’ just feels like it has a negative connotation) that can be hard to find or may not be that well known. So, I’d like to share cool things when I come across them! So let’s dive in.

How Level 1 saving for retirement works

For many of us, retirement may seem like something super far off. Why worry about something 30 years from now when we’ve got bills and headaches to deal with today. The hope is that as you develop and progress on your own financial journey that you start getting a little bit of breathing room here and there and can start saving for retirement. There’s the concept of time value of money and even saving a little bit now (and re-investing the growth) can add up in big ways over a long period of time. There are some great examples in this article if you don’t want to take my word for in this article.

One you start saving for retirement, you’ll likely do so via a 401(k) – an employer sponsored retirement plan. The IRS lets you put away $22,500 in 2023 (it’ll slightly change year to year) and it’ll vary by employer but commonly you’ll be able to put 401(k) money in a Traditional 401(k) vs. a Roth 401(k). Traditional is pay no tax now…pay tax later when you retire and Roth is pay tax now…no tax later when you retire. This opens up a big philosophical debate on what you think taxes will look like in 30+ years when you retire and money now vs money later…I don’t have a crystal ball and personally I split the difference but that’s just me. I don’t think there’s a wrong answer TBH.

Ok so now you’re contributing an amount – 1% of your paycheck up to the max your employer will let you pull out and your employer will start pulling that money and putting it into a retirement account. You’ll have to pick your investment options – another TLDR philosophical debate but I just pick a target date fund – a 2050 fund for me around the time I hope to retire. This fund automatically adjusts – more risk when I’m younger and have more time and less risk when I’m older and have less time before retirement.

If your employer offers a match – congrats that’s free money being given to you. Matches can vary by employer – both in the amount (either dollar or percentage) and also in it’s vesting schedule. At my first job I got a 2% match – and it was paid out annually in December of each year, meaning if I left before December I would forgo that 2% match. My second company had a 4% match (if memory serves me correct) and it vested over a 4 year period. My current company has a 6% match up to $5,000 and it vests immediately.

If your company offers a match, I strongly recommend contributing at least up to that amount to take full advantage and get the whole match.

Level 2 work towards 15%

Dave Ramsey (and many others) recommend saving 15% of your paycheck to retirement. To be candid this took me a few years to hit – I needed money for other things – like aggressively paying off student loans, building my emergency fund, and saving for a house. But, after a few years I got to 15%! The journey of personal finance (IMO) is a slow but steady one…and hopefully as a snowball rolling down the mountain goes – it speeds up!

Depending on your financial situation you could contribute more if you wanted to – by all means! 15% is a good number to work towards.

Level 3 – Go above $22,500

In 2023, the max you can contribute to a 401(k) is $22,500. This number will go up to $23,000 in 2024. Outside of that you contribute $6,500 (in 2023) to an IRA – an individual retirement account. However if you make more than $153,000 as a single filer or $228,000 as a married couple you cannot contribute to an IRA. So the question becomes – how else could you contribute?

If you find yourself blessed with extra income and the ability to save more than $22,500 in a 401(k) you could and likely would just put that money in a regular brokerage account. However, a regular brokerage account doesn’t have the tax benefits that come with a 401(k) or an IRA. I like to minimize my taxes if possible!

Enter in the After-Tax 401(k) Contribution. The IRS actually allows you to contribute a MAX of $66,000 in 2023 and $69,000 in 2024 to a 401(k). This includes your contributions and your employer’s match ($5,000 in my current case). So, that means you have the ability to contribute $30,000-$40,000 to a 401(k). The catch is that your employer must offer this as an option to you – and according to this article – 22% of American employers offered such an option.

Within your 401(k) portal (or HR benefits portal) where you designate how much to pull aside for Traditional and Roth you can there put in the after tax percentage you’d like pulled out. Then – and this is apparently super important – you need to call your brokerage or do it online but have them “setup automatic transfers of your after-tax 401(k) contributions to a Roth 401(k).  If you don’t do this your after tax is basically a regular brokerage account! But assuming you do it it’ll then allow you to have more Roth money in your 401(k)!

Taking a step back – this makes very little sense to me…why more companies don’t offer this…why I have to call and setup the automatic conversion…why the IRS doesn’t just make the max $66,000 vs. $22,500 but I don’t make the rules – I just follow them and try to win as much of the game as I can!

TLDR

I’m thankful for the opportunity to a) save for retirement b) save the max contribution amount by the IRS and c) have an employer that allows for after-tax 401(k) contributions and d) the means to do so! Personal finance is full of little tips and tricks and I hope you enjoyed learning (if you didn’t know already) about the after-tax 401(k) contributions!

Even if you’re not able to benefit from this now keep it in your back pocket as possibly a goal to work towards!