Should Ford Employees Contribute After-Tax Money to a 401k?

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

Earlier this month, my colleague, Matt Trujillo and I hosted a webinar for Ford Motor employees to discuss the potential benefits of contributing after-tax dollars to their 401k plan.  These Ford workers are not alone. About 25% of companies offer retirement plans with after-tax contributions that are completely separate from the plan’s Traditional 401k or Roth 401k (Columbia Management). Recent IRS rulings have made contributing to the after-tax component far more attractive because, once an eligible distribution event is met, the dollars can be rolled over to a Roth IRA for tax-free growth.  Most employees aren’t even aware their plan offers after-tax contributions and, if they do, there is typically confusion around how it works and if it makes sense for them.

Do After-tax Contributions Make Sense for Me?

In most cases, the after-tax portion is the best fit for someone who is currently maximizing their pre-tax/Traditional 401k but who still has the capacity to save more for retirement.  As mentioned before, the after-tax contribution is a separate contribution type and is above and beyond the normal 401k limits ($18,000 in 2015, $24,000 if over the age of 50 however, subject to the overall $53,000 plan limit).  It is really all about making “excess savings” as efficient as possible.  Tax-free accounts are about as efficient as they come and can potentially save an individual or family hundreds of thousands of dollars in retirement.  For more information, this blog by Tim Wyman goes into greater detail on contributing after-tax dollars into your plan.

Every 401k plan is different and they all have their nuances.  This is why we’ll be hosting company-specific webinars in the coming months to review how the after-tax component works in specific plans and to go over the pros and cons. This kind of information can help you decide if an after-tax plan makes sense for you.  Keep your eyes open for e-mails, blogs, and more on our Facebook, Twitter, and LinkedIn pages for updates on webinars we will be hosting in the near future!

As always, if you have specific questions relating to your company retirement plan, never hesitate to reach out to us. We are here to help! 

Unless certain criteria are met, employees must be 59½ or older and must have satisfied the five-year period that starts with the year the employee makes his or her first Roth contribution to the 401k plan before tax-free withdrawals are permitted.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and investors may incur a profit or a loss. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.