This lesser-known 401(k) feature can kickstart your tax-free retirement savings
If you're eager to increase your retirement savings, a lesser-known 401(k) feature could significantly boost your nest egg, financial advisors say.
For 2025, you can defer up to $23,500 into your 401(k), plus an extra $7,500 in "catch-up contributions" if you're age 50 and older. That catch-up contribution jumps to $11,250 for investors age 60 to 63.
Some plans offer after-tax 401(k) contributions on top of those caps. For 2025, the max 401(k) limit is $70,000, which includes employee deferrals, after-tax contributions, company matches, profit sharing and other deposits.
If you can afford to do this, "it's an amazing outcome," said certified financial planner Dan Galli, owner of Daniel J. Galli & Associates in Norwell, Massachusetts.
Here's a look at other stories impacting the financial advisor business.
"Sometimes, people don't believe it's real," he said, because you can automatically contribute and then convert the funds to "turn it into tax-free income."
However, many plans still don't offer the feature. In 2023, only 22% of employer plans offered after-tax 401(k) contributions, according to the latest data from Vanguard's How America Saves report. It's most common in larger plans.
Even when it's available, employee participation remains low. Only 9% of investors with access leveraged the feature in 2023, the same Vanguard report found. That's down slightly from 10% in 2022.
After-tax and Roth contributions both begin with after-tax 401(k) deposits. But there's a key difference: The taxes on future growth.
Roth money grows tax-free, which means future withdrawals aren't subject to taxes. To compare, after-tax deposits grow tax-deferred, meaning your returns incur regular income taxes when withdrawn.
That's why it's important to convert after-tax funds to Roth periodically, experts say.
"The longer you leave those after-tax dollars in there, the more tax liability there will be," Galli said. But the conversion process is "unique to each plan."
Often, you'll need to request the transfer, which could be limited to monthly or quarterly transactions, whereas the best plans convert to Roth automatically, he said.
Before making after-tax 401(k) contributions, you should focus on maxing out regular pre-tax or Roth 401(k) deferrals to capture your employer match, said CFP Ashton Lawrence at Mariner Wealth Advisors in Greenville, South Carolina.
After that, cash flow permitting, you could "start filling up the after-tax bucket," depending on your goals, he said. "In my opinion, every dollar needs to find a home."
In 2023, only 14% of employees maxed out their 401(k) plan, according to the Vanguard report. For plans offering catch-up contributions, only 15% of employees participated.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
4 hours ago
- Yahoo
1 Artificial Intelligence (AI) ETF to Buy Hand Over Fist and 1 to Avoid
Some index funds provide not only diversification but also exposure to high-growth areas like AI. The Vanguard Information Technology ETF tracks an index that includes over 300 tech stocks. The Ark Invest Autonomous Tech and Robotics ETF is concentrated with fewer than 40 stocks. 10 stocks we like better than Vanguard Information Technology ETF › It looks like artificial intelligence (AI) is more than the latest fad. The technology is becoming an integral part of how people do things, from work to play, offering solutions to simplify complex activities. Many companies are investing billions of dollars into it in their efforts to become leaders in aspects of the industry or to maintain their positions in their established arenas. Based on various forecasts, AI could become a trillion-dollar industry, and the companies that succeed in leading the charge could create tremendous shareholder value. Naturally, many investors are trying to predict which ones are going to be the winners and allocate their funds accordingly. However, since it's important to diversify your portfolio across many industries, it doesn't make sense for most investors to pick too many AI stocks. If you're looking for a way to get exposure to the AI revolution without placing too much money into that single industry, consider buying an exchange-traded fund (ETF) that's focused on AI. That would give you easy exposure to a variety of stocks in a single asset, allowing you to benefit from many winners without overexposing yourself to the space or increasing your risk through a lack of diversification. There are many AI ETFs to choose from, but I would recommend buying the Vanguard Information Technology ETF (NYSEMKT: VGT) and avoiding the Ark Invest Autonomous Tech and Robotics ETF (NYSEMKT: ARKQ). Here's why. Vanguard offers about 80 different ETFs that suit an array of different investing needs. What unites them is that they're all passively managed, meaning they each track an established index instead of having a fund manager choose the stocks. There are many benefits to this strategy. First of all, it provides instant and wide diversification. The Vanguard Information Technology ETF tracks the MSCI US Investable Market Information Technology 25/50 Index, which includes 307 small-, medium-, and large-cap companies. It's a weighted index, so larger companies make up higher percentages of its total value. The top three components are Apple, Microsoft, and Nvidia, which collectively account for about 46% of the total. However, because there are so many stocks in the portfolio, the risk from any single company's potentially poor performance is minimized. And index funds don't have to pay highly compensated fund managers to choose stocks which stocks to buy and sell, their fees are much lower than those of actively managed funds. The Vanguard Information Technology ETF has an expense ratio of just 0.09%, which compares quite favorably with the industry average of 0.92%. Because AI and technology have been huge growth industries, this ETF has delivered fantastic results over the medium term. In fact, it has been Vanguard's best-performing ETF over the past 10 years, with 19.8% annualized gains. AI is still in its infancy, and as the market looks like it's recovering, now could be a great time to take a position. The Ark Invest Autonomous Tech and Robotics ETF has also done well over the past 10 years, but not nearly as well as the Vanguard ETF. It experiences many of the same tailwinds -- and risks -- as the Vanguard fund does in terms of industry growth, but the Ark fund is a riskier investment because it only has 37 components. So when some of them go south, its portfolio will take a proportionally more intense beating. Moreover, in broad market downturns, many traders tend to run to safe stocks. In such times, those value stocks can cushion a portfolio. An ETF that's focused solely on growth stocks is bound to feel more pain in those times, though its relative portfolio diversity will mitigate some of that risk. The Ark Invest Autonomous Tech and Robotics ETF also focuses more on emerging stocks than market leaders. Its top holdings are -- in sharp contrast to the Vanguard ETF's established giants -- Tesla, Kratos Defense and Security, and Palantir Technologies. These stocks trade at ambitious valuations, which makes them more susceptible to steep drops if the market's mood changes or their business results come under pressure. Both of these ETFs are riskier than a value-oriented ETF or even an ETF that tracks a broad index like the S&P 500. But over time, they have so far rewarded investors who can handle that risk. If you're ready to invest in the future of AI but are concerned about current market uncertainty, the Vanguard Information Technology ETF looks like a smart way to play it. Before you buy stock in Vanguard Information Technology ETF, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Vanguard Information Technology ETF wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $669,517!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $868,615!* Now, it's worth noting Stock Advisor's total average return is 792% — a market-crushing outperformance compared to 171% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 2, 2025 John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy. 1 Artificial Intelligence (AI) ETF to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool
Yahoo
5 hours ago
- Yahoo
'Peak 65': How 4.2 million Americans turning 65 will reshape money conversations
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. The US is entering a historic demographic shift: In 2025, a record 4.2 million Americans are forecast to turn 65, the largest number in a single year. This milestone, dubbed "peak 65," is a 'huge demographic moment,' Fiona Greig, global head of investor research and policy at Vanguard's Investment Strategy Group, said on the Decoding Retirement podcast (see video above or listen below). 'Not until 2050 will so many people again be turning 65,' she said. 'This is the largest bulge in our aging population that we've ever experienced.' Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals? It's also a massive financial moment. The baby boomer generation has accumulated an estimated $82 trillion in wealth. Some of that will be spent in retirement — on travel, healthcare, or long-term care — but a substantial portion will also be transferred to the next generation, either as a planned inheritance or when older adults outlive their resources. This massive shift of wealth raises an important question: Who's next in line? In many cases, it's a spouse — often a woman. 'Married women have about a 70% chance of outliving their husbands,' Greig said. 'And if they do, they can expect to live for another 10 years.' It also means families must talk openly — and early on — about money, discussing what kinds of assets they have, where they are held, and what their goals are. 'These are not just estate planning questions,' Greig said. 'They're essential financial conversations that can help families manage both assets and expectations.' These discussions may be uncomfortable, as discussing money — especially across generations — has long been considered taboo. Read more: Retirement planning: A step-by-step guide But that's starting to change. Today, more families are facing these questions earlier, often due to student debt, college funding, or early participation in 401(k) plans. Trading apps and financial platforms are also pushing younger generations to talk about investing. That exposure is shifting attitudes, which is reason for optimism. 'I'm hopeful that families can have a more honest conversation through the years — not just when it matters most in retirement,' she said. For older adults, the desire not to be a burden on their children is common — but good intentions don't replace planning. Waiting too long to talk about finances can lead to confusion or a crisis, especially as people age. 'With these longer lifespans, about two-thirds of 70-year-olds can experience some form of cognitive decline,' Greig said. 'I'm not saying full-on dementia, but we start to lose our acuity.' The result? Greater vulnerability to scams, mistakes, or poor decisions. 'If there's a simple reason to have this conversation with the next in line, it's to protect the assets that the family has worked so hard to accumulate,' she said. Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service.
Yahoo
a day ago
- Yahoo
Vincent Chan Unveils How You Can Make Your Children Rich: 'It's A Lot Easier Than You Think'
Many parents want to set their children up for more financial success than what they had growing up. It's a noble goal that may sound challenging, but financial TikToker Vincent Chan recently revealed a simple roadmap for making your children rich. "It's a lot easier than you think," he explained. You've heard of investing, traditional retirement accounts, and Roth IRAs, but Chan is talking about a different account that most people are underutilizing. Here's how you can make your children rich. Don't Miss: Maker of the $60,000 foldable home has 3 factory buildings, 600+ houses built, and big plans to solve housing — Maximize saving for your retirement and cut down on taxes: . A 529 Plan is one of the best tax-advantaged accounts for building wealth. This account does not have a maximum contribution limit, and the money grows tax-free. If you're single, you can give up to $19,000 per year for each child. However, if you are married, you can give each child up to $38,000 per year without having those contributions count toward your lifetime gift tax exemption. You can only use 529 plan funds for educational expenses like college and school supplies. Paying for your child's education will give them a tremendous head start, but that's not the only benefit of this account. You don't even have to wait until you have children to create one of these accounts. Individuals can create 529 plans for themselves and list their children as beneficiaries later. You can save for your child's financial future before you even get married. Trending: Invest where it hurts — and help millions heal:. You don't have to make flashy financial moves to make your children rich. Chan recommends investing the money and watching it grow instead of trying to time the stock market or use options. Most investors just have to find a good ETF that tracks a popular benchmark like the S&P 500 or Nasdaq Composite. These ETFs are already diversified, and you can find ETFs that align with your long-term financial goals. Your children won't be able to access the money for a while, so it's usually a good idea to take a growth-oriented approach with these accounts. They have plenty of time to ride market volatility and corrections before they can access the money.A 529 savings plan is a great resource to cultivate generational wealth, but you still have to practice good money habits to make annual contributions. Chan regularly teaches people how to establish good money habits, but it rarely involves doing anything out of the ordinary. Chances are you know about most of the good money habits. Creating a budget, knowing your expenses, picking up a side hustle, investing your money, and pursuing career opportunities that boost your income are some of the top money habits. Building wealth for your children now can give you more motivation to stick with long-term financial goals and develop discipline. It's easier to act upon goals when you have a purpose that is bigger than yourself, and most people discover something bigger than themselves when they become parents. Read Next: Here's what Americans think you need to be considered wealthy. Image: Shutterstock Up Next: Transform your trading with Benzinga Edge's one-of-a-kind market trade ideas and tools. Click now to access unique insights that can set you ahead in today's competitive market. Get the latest stock analysis from Benzinga? APPLE (AAPL): Free Stock Analysis Report TESLA (TSLA): Free Stock Analysis Report This article Vincent Chan Unveils How You Can Make Your Children Rich: 'It's A Lot Easier Than You Think' originally appeared on © 2025 Benzinga does not provide investment advice. All rights reserved. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
