Although your pretax contributions to an employer sponsored plan are capped, you may be able to make an after-tax contribution to your account if your employer’s limit is higher than the government’s limit. The amount you could be eligible to add is the difference between the government’s cap and the amount you would have been allowed to contribute based on the percentage of pay your employer permits.
For example, if your salary is $125,000 and your employer caps contributions at 15%, you could make an after-tax contribution of $3,250. That’s the difference between the $18,750 employer limit ($125,000 x 15% = $18,750) and the government’s $15,500 cap for 2008.
You would pay income taxes on the $3,250 after-tax amount in the year you made the contribution. But once the money was invested, any earnings would accumulate tax deferred.
One advantage of making after-tax contributions is the opportunity to build a larger retirement savings account. However, mixing pretax and after-tax money in the same account may complicate the tax picture when you are ready to withdraw from or roll over your account.
It’s Not Excess
An excess contribution isn’t the same as an after-tax contribution. You’ve made an excess contribution when you contribute more pretax income than is permitted for the year. That might happen if you receive a raise and forget to lower your contribution rate. Unless you take the excess out before the end of the year, you’ll owe a 10% penalty.
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