Fly, You Fools, Into Financial Freedom: A Wizard's Guide to 401(k)s

A Secret Known Only to a Few

Hoom! Gandalf here reporting from the wide world where even wizards must plan for their twilight years though I doubt I'll ever truly retire. I've stumbled upon a curious thing a '401(k),' as the mortals call it a sort of dragon's hoard for one's future. And within this hoard lies a secret a way to increase your treasure beyond the ordinary. It involves something called 'after tax contributions.' Now don't let the name fool you; this isn't some goblin trick. It's a legitimate path to amassing a richer nest egg especially if you're old enough to remember when the Shire was just a collection of rabbit holes.

The Numbers You Say? Very Well...

For the coming year of 2025 the wise among you can stash away up to $23,500 into your 401(k). And for those of you who've seen half a century of sunrises (like myself though I've lost count after a few millennia) there's an extra $7,500 in 'catch up contributions.' And if you are between 60 and 63 years of age that amount is $11,250. But here's where the real magic happens: some plans allow 'after tax 401(k) contributions' on top of those amounts potentially allowing you to reach a maximum of $70,000. As the esteemed financial planner Dan Galli says 'Sometimes people don't believe it's real.' And indeed it sounds like something out of a fairy tale. But it's as real as the Ringwraiths though hopefully less perilous.

Not All Who Wander Are Lost But Many Are Unaware

Alas like the location of Elrond's hidden valley Rivendell this feature is not universally available. In the year 2023 a mere 22% of employer plans offered these after tax contributions. And even when available only 9% of investors took advantage. It seems many are like Bilbo hesitant to leave their comfortable hobbit holes and venture into the unknown. But remember 'It's a dangerous business Frodo going out your door. You step onto the road and if you don't keep your feet there's no knowing where you might be swept off to.' But in this case being swept off might lead to a comfortable retirement!

Tax Free Growth: A Precious Opportunity

Now pay attention for this is crucial: After tax contributions and Roth contributions both begin with after tax deposits. The key difference lies in what happens next. Roth money grows tax free meaning future withdrawals are as untaxed as elven bread lembas. After tax deposits however grow tax deferred meaning your returns incur regular income taxes when withdrawn. Therefore it's essential to convert after tax funds to Roth periodically lest you find yourself paying more taxes than necessary.

The Conversion Process: A Quest of Its Own

Ah but the conversion process is 'unique to each plan,' like the riddles of Gollum. You might need to request the transfer monthly or quarterly or if you're lucky your plan might convert to Roth automatically like magic! The longer you leave those after tax dollars unconverted the more tax liability you'll incur. So be vigilant my friends and convert those funds with haste!

One Does Not Simply Max Out After Tax Contributions

Before you go running off to fill your after tax bucket like a dwarf in a gold mine remember the wise words of Ashton Lawrence: Focus on maxing out regular pre tax or Roth 401(k) deferrals first to capture your employer match. That employer match is like finding mithril in Moria; it's precious and should not be ignored. Only after securing that bounty should you consider after tax contributions depending on your financial goals. In 2023 a mere 14% of employees maxed out their 401(k) and only 15% participated in catch up contributions. Don't be like those foolish few! Seize the day and secure your future!