Episode #36- Are Your Really Maxing Out Your 401k?

Wealth Decisions Podcast Transcript for Episode #36: Are Your Really Maxing Out Your 401k?

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

And I have a passion for helping people make better decisions around their money and their life.

So for the sake of time, let's dive right into it.

In today's episode, we're going to be diving into a question that might make you rethink your retirement strategy.

The title of today's podcast is, Are You Really Maxing Out Your 401k?

I think you might be surprised to learn that what you think is maxing out might not be taking full advantage of this very powerful retirement tool.

So we're going to break it down and just ensure you're on the right track to a comfortable retirement.

I often ask this question, Are You Maxing Out Your 401k?

And I get different answers.

Some people think that maxing out their 401k is just going up to the match.

Some people don't realize that the matching contributions are on top of the limits.

And we'll go in to the details on this topic, starting with what does maxing out really mean?

When most people talk about maxing out their 401k, they're typically referring to the amount that they're contributing.

It's the annual limit set by the IRS.

And for 2,024, that limit is 23,000 for those under age 50, and 30,500 for those 50 or older, thanks to the catch-up contribution provision.

But here's the kicker.

Contributing to this limit might not actually be maxing out in the true sense.

There's more to consider, such as employer matching, after-tax contributions, and the mega backdoor Roth strategy.

So let's dive just a little deeper into what a full 401K optimization kind of looks like.

First of all, let's talk about your employer matching.

This is essentially free money, and it's surprising how many people leave this on the table.

Now let's say your employer offers 100% match on the first 4% of your salary that you contribute.

If you're making $100,000 a year and only contributing 3%, you're missing out on $1,000 of free money annually.

That might not sound like much, but over 30 years, assuming a 7% annual return, that's over 100,000 you're leaving potentially behind.

So, an action step would be to review your employer's matching policy and make sure you're contributing at least enough to get that full match.

This should be your absolute minimum 401k strategy.

Now let's look just a little bit beyond the match.

And there's an IRS limit that once you've secured kind of the employer match, the next step is to aim for the IRS limit that I mentioned earlier.

That's 23,000 for 2024 if you're under age 50 and 30,500 if you're age 50 or older.

But here's where it kind of gets interesting.

These limits only apply to your pre-tax and Roth 401k contributions combined.

There's actually more room in your 401k than most people know and maybe even utilize.

So let's break down just a common misconception.

Let's say your employer is matching 5,000 a year.

Most people think that they can only contribute 18,000 of their own money, which gets them to the 23,000 limit.

You might think you've maxed out, but the employer match does not count towards your personal contribution limit.

You can still put in your full 23,000 and your employer's 5,000 on top.

So always focus on trying to hit your personal limit.

Don't worry about what the employer match necessarily is.

You want to be able to max out your personal contribution, which would be that 23,000.

Now let's talk just a little bit about a hidden opportunity in most 401k plans.

Some 401k plans allow for after-tax contributions beyond the standard limits.

And the total limit for all 401k contributions, that means your contributions, the employer match, and after-tax contributions combined, is much higher than the 23,000 for people age 50 and under.

The limit is actually 69,000 for 2024.

Or 76,500 if you're age 50 or older.

This means that if your plan allows it, you could potentially contribute tens of thousands more to your 401k after you've hit your regular contribution limit.

And what's cool is these after-tax contributions don't give you any immediate tax break, but they do grow tax-deferred.

And if your plan allows in-service distributions or in-plan Roth conversions, you can use these after-tax contributions to fuel what's known as the mega Roth strategy.

And this just involves converting your after-tax contributions to your Roth at the end of the year, allowing for that money to grow tax-free on a much larger sum.

The mega Roth is an advanced 401k maximization.

Not everyone can contribute another 5, 10, 15% of their income, but if you have the ability to do this, the mega Roth strategy is a powerful way to get more money into tax-advantaged accounts.

And especially if you're over the income limits to contribute to a Roth IRA, this allows you to super fund your Roth contributions.

And so you'll max out your regular 401k contributions, whether that's 23,000 if you're under age 50 or 30,500 if you're over age 50, contribute after-tax dollars up to the overall limit, and then convert those after-tax contributions to your Roth IRA at the end of the year.

This strategy allows you to potentially get up to 69,000 or 76,500 if you're over age 50 into tax advantage accounts each year.

That's a lot more than just the standard contribution limits.

Now, of course, the strategy isn't available in all 401k plans, and it may not be right for everyone.

You may not have the ability to contribute that much more towards retirement.

But if you do make a higher income and you're looking for ways to superfund your retirement, the mega Roth strategy would be a good solution if your 401k allows it.

So are you really maxing out your 401k?

If you're not considering your employer matching, if you're not hitting your IRS limits on your own with your own contributions, and exploring some type of after-tax contributions, and investigating mega Roth possibilities, you might be leaving some money on the table.

So here's some action steps.

Number one, ensure you're getting your full employer match.

Number two is to aim to hit the standard IRS contribution limits with your own contributions.

Number three, check if your plan allows after-tax contributions.

When you pull up the screen for your 401k, when you sign on, you should see pre-tax, Roth and after-tax if it's available.

If it's not available, ask your employer to consider adding it to the 401k so that more and more employees can take advantage of that feature to get more money in Roth IRAs for tax advantage, investing down the road and tax-free income.

Number four, consider consulting with a financial advisor to see if some of these strategies like the mega Roth strategy makes sense for you.

Everyone's financial situation is unique.

Everyone's situation is different.

What works for one person might not work for everyone.

The key is just to understand all your options so that you can make informed decisions about your retirement savings.

So that's it for today's episode.

Are you really maxing out your 401k?

And if you liked this episode, please rate the episode, make some comments and hit the notification bell to get updated on future Wealth Decision Podcasts.

And please, if you could, share it with a family member or a friend.

My goal with the Wealth Decisions Podcast is to reach over 100,000 people by the end of the year in the Twin Cities and beyond, so that people can make better wealth decisions to live a richer life.

If you'd like to schedule a discovery call with me, you can go to my website at momentouswealthadvisors.com.

And I'll spend some time to get to know you a little bit and find out if I might be able to steer you in the right direction or help you with your financial future.

Once again, thanks for listening and have a great weekend.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

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