How much money can I save in my 401(k)?

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Q. I contribute only to my non-Roth 401(k) account. My understanding is that the max I can contribute is $19,500 for 2021. I am in the 24% tax bracket and can’t contribute to a Roth IRA due to my wife’s and my income, so I was hoping I could contribute an extra $6,000 to my 401(k). Can I?
— Eating ramen to retire early

A. Glad to hear you’re trying to save.

Let’s go through how the income limits work for these accounts.

In 2021, you can contribute up to $19,500 into a 401(k) pre-tax, meaning you get a tax deduction in the year you make the contribution, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.

If you’re over the age of 50, you can contribute an additional $6,500 as a “catch-up contribution,” he said.

In addition, some employers match some or all your contribution or make a “profit-sharing contribution,” commonly called “matching funds,” to your account.

Tax on your contribution, the employer contribution and earnings are deferred until retirement, which the IRS defines as over the age of 59.5 years, he said.

Some 401(k) plans offer a Roth 401(k) account that allows you to contribute money after-tax, meaning you do not get a tax break in the year you contribute, Panambur said.

“As a Roth account, once the money is inside the account, if some conditions are met, you don’t ever have to pay taxes,” he said. “Your contribution to a Roth 401 (K) account is limited in the same way as a regular 401(k) account. The maximum contribution you are allowed is $19,500 plus a catch-up contribution of $6,500 if you are over the age of 50.”

A Roth 401(k) account does not have income limits as a Roth IRA, making it accessible to a larger group of employees, he said.

Self-employed people can create a solo 401 (K) account to get similar benefits and contribute both as an employee and employer, he said.

There is another possible way to contribute to a 401 (K) account if the plan custodian allows it, Panambur said.

“You can contribute after-tax dollars into a 401(k) plan such that the total contribution between you and your employer — pre-tax, after-tax, match and profit-sharing — is not more than $58,000, or $64,500 if you are over the age of 50,” Panambur said. “The advantage of making after-tax contributions is that you can roll these into a Roth IRA account when your employment ends or if the custodian allows it, through in-service distributions.”

This is often dubbed as a “mega back door Roth IRA” and is especially useful for high earners who cannot directly contribute to a Roth IRA because of income limits, Panambur said.

Good luck with your savings.

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This story was originally published on Oct. 26, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.