In December 2012, after Mr. Sam had maxed out his 401k, I noticed that he was still contributing to his 401k in something called an "after-tax option."
We both thought the "after-tax option" was his Roth 401k option. I was certain that he couldn't go beyond the contribution limit of $17,000 between his regular 401k and his Roth 401k. And, I was correct, the 2012 contribution limit of $17,000 applies both to the 401k and the Roth 401k or a combination of contributions to both. So, I promptly freaked out as I was concerned that he had gone above and beyond the 2012 contribution limits and we were going to be back on the naughty list for the IRS (we previously were audited).
So three calls to Fidelity later and we learned that Mr. Sam's company offers an after-tax spillover contribution option in its 401k. What that means, is that Mr. Sam can max out his 401k with pre-tax dollars up to the contribution limit of $17,000 ($17,500 in 2013) and then he can continue contributing to his 401k with after tax dollars up to a maximum of $50,000.
This is one of those retirement options that most people have never heard about. So, why would we want to put more after-tax money into Mr. Sam's 401k? For us, the big advantage is the company match. Mr. Sam gets a great match and that match continues with the after-tax spillover contribution. So for each extra dollar he puts in he gets an immediate 20% return. While, his match is in company stock, since he is vested he can sell that stock at any point.
Now that we know about this option, we need to figure out how we better take advantage of this investment option in 2013.
Have you heard about the after-tax spillover? Do you have that option in your plan? If yes, do you use it?