How to Accumulate Wealth by Investing More Money into your 401kSubmitted by Mission Financial Planning on April 16th, 2020
If you do a quick Google search to find out how much you can contribute to your 401k, you’ll usually find that the most you can defer from your salary is $19,500*. In reality, the maximum that can go into a 401k is $57,000*.
*If you’re over 50, add $6,500 to both of these numbers.
How can you fund the difference between that $19,500 and the true maximum of $57,000+?
The difference between the salary deferral limits and the REAL maximum can be made up in several ways; each is useful in different strategies. Here are two common situations we see during annual meetings with our clients:
- Most dental practice owners who sponsor a 401k for their employees will know one of the answers right away, and you may already be doing it. A practice owner can fund the difference with a discretionary (optional) pre-tax profit-sharing contribution with money from the practice. To qualify for this, funding for eligible staff is also required, on a pro-rata basis. Several formulas for funding the staff profit sharing can be tested for best results. We can help you determine the best option for you and your practice moving forward.
- Another way to contribute funds in excess of the $19,500 ($26,000) salary deferral is to make Non-Roth Post-Tax contributions, up to the $57,000 ($63,500) maximum, eventually rolling the post-tax contributions to a Roth IRA.
The Non-Roth Post-Tax contribution is personally taxable, both FITA and FICA, but it has the potential to grow tax free if rolled to a Roth IRA. Some are calling this a “Mega Backdoor Roth”. Over enough years, the tax hit up front would be well worth years of tax-free growth.
Owners and their spouses are still subject to 401k testing to make sure retirement plans are fair to all employees. There are several design features that need to be included in the 401k plan to fully take advantage of this strategy, but this could be a great way to super-charge your ability to get money into a Roth IRA. We are glad to discuss your current situation in depth to see if this is the best wealth management strategy for you.
Even if you’re not a practice owner, an employee with a 401k can fund the difference themselves, if your 401k plan allows it – not many do. This would be a great strategy for anyone wanting to get more money saved for retirement, and is particularly attractive for someone in a lower tax bracket.
These are just a few investment planning options, contact Mission Financial Planning and talk to certified financial planner, Sharon Weaver, or Jared Wood about the intricacies of how you can maximize the capacity of your 401k plan.