In 2023, just 14% of workers fully optimized their 401(k)s, maxing out their contributions. This alarming statistic points to a trend that is making financial experts increasingly nervous — Americans aren’t taking full advantage of their retirement savings opportunities. In 2025, the ceilings on 401(k) contributions will rise. Employees need to understand the very real value of these plans, particularly the aspects that can significantly increase their tax-free retirement savings.
Second, the maximum contribution limit for a 401(k) plan is slated to increase to $70,000 for 2025. Employees will have the opportunity to defer as much as $23,500 into their 401(k) accounts. Workers 50 and older can benefit from “catch-up contributions” that let them contribute an additional $7,500 each year. Specifically, for those between 60 and 63, the catch-up contribution limit will rise to $11,250.
Despite these generous provisions, participation remains low. In 2023, just 15 percent of all employees were enrolled in 401(k) plans that had provisions for catch-up contributions. In fact, only 9% of investors who had the option available utilized the after-tax 401(k). This lack of adoption is surprising, given that 22% of employer-sponsored plans even offered this feature.
The new after-tax 401(k) allows for these contributions to be auto-allocated in tax-free investment settings within a Roth 401(k). Because future withdrawals from a Roth account are generally tax-free, the account can be an attractive long-term savings tool. Financial advisors emphasize the importance of maximizing regular pre-tax or Roth 401(k) deferrals to capture any employer match before considering after-tax contributions.
Dan Galli, a financial advisor, emphasizes a strategic approach: “In my opinion, every dollar needs to find a home.” He encourages staff to focus first on making sure they’re getting the free money from an employer match through regular contributions, before turning their attention to after-tax options. Galli further cautions that “the longer you leave those after-tax dollars in there, the more tax liability there will be.”
Ashton Lawrence, the retired financial expert who procured Galli’s $110 billion advice, joins Galli in recommending it. His advice is for people to focus on maxing out their regular pre-tax or Roth contributions first. Both experts agree that it makes sense to temporarily move after-tax 401(k) dollars into Roth accounts from time to time. Filing correctly can save individuals from enormous unexpected tax burdens in the future.
This lack of awareness of these unique features could prevent employees from getting the most out of their retirement plans. That’s a lot of money that would go a long way to helping investors better understand the uses and benefits of after-tax contributions and Roth conversions.