Experts: How To Save More in Your Employer’s Retirement Plan
If you’re part of an employer-sponsored retirement plan, chances are you might be wondering whether there are other ways to maximize this plan.
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The answer to this question goes a little deeper than general tips like contributing enough to earn the full match or increasing contribution rates. You might find there are lesser-known savings options. Here’s how you can save more in your employer’s retirement plan.
Does Your Employer’s Plan Allow for After-Tax Contributions?
This is the first item Jonathan Gassman, CFP and principal at Prager Metis, recommends employees look into with a work retirement plan.
“I cannot begin to tell you how often I speak with clients informing them their plan allows for more than the standard annual pretax contribution of $22,500 for those under age 50 and $30,000 for those over age 50,” Gassman said. “You may contribute even more if your plan allows …”
Employees can get the answers by contacting the administrator or going online and reading the summary plan description. If you find the answer is yes, Gassman recommends participants maximize the pretax limits. Review this information with your CPA or financial advisor to discuss how much more you’re comfortable contributing.
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Does Your Employer Offer a True-Up?
Sometimes it isn’t in your best interest to maximize your plan before the end of the year.
Joseph M. Favorito, CFP and managing partner at Landmark Wealth Management, said an employer match is often structured to match a percentage of your contribution up to a limit. Employees who max out their plan by October and do not contribute in November and December could be losing the employer match during those two months. This means leaving free money on the table.
Check with your employer to see whether they offer a true-up. Favorito said this means if you max out your plan early, the employer will still contribute to the plan for the remaining months. This is regardless of whether you are making a contribution.
“If no true-up is offered, you should set up your contributions so the $22,500 [the standard maximum] is divided equally across the total number of paychecks you receive annually,” Favorito said.
Does Your Employer Offer an Annual Increase Program?
Megan Yost, SVP, communications at Segal, said some employers offer annual increases to retirement plan participants. This allows you to increase your savings rate automatically each year until you hit a specified limit, like 10%.
Can You Take Advantage of Catch-Up Contributions?
Participants 50 or older may be eligible to make catch-up contributions to their retirement plans and contribute more money than the annual limit.
Dustin C. Newton, CFP and financial advisor at Ascent Financial Group, said the catch-up contribution increased to $7,500 in 2023. This means those ages 50 and older can contribute a maximum of $30,000 to their 401(k) for this year.
Is a Mega Backdoor Roth Opportunity Available?
A mega backdoor Roth refers to making after-tax contributions to a 401(k) plan and rolling these contributions over into a Roth IRA. This strategy, Newton said, allows participants to save a maximum of $66,000 in their 401(k) in 2023.
How does it work? In a normal 401(k), the contribution limit for 2023 is $22,500 — or $30,000 for those 50 and older. Newton said the mega backdoor Roth lets you put an additional $43,500 of after-tax dollars into your 401(k) account, assuming you don’t get an employer match. If you do receive a match, you’ll need to deduct your employer contributions from the $43,500.
“This can be a great way to supercharge your retirement savings,” Newton said, “and take advantage of tax-free growth and withdrawals in retirement.”
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