After-Tax 401(k) Contributions Shouldn't be an Afterthought
With the popularity of Roth 401(k) contributions, after-tax (non-Roth) employee contributions have gotten short shrift. But, if your plan offers them, after-tax contributions are worth considering. They can significantly boost your retirement savings and can sometimes be funneled into Roth accounts while you’re still working.
What are After-Tax Contributions?
After-tax contributions are contributions you make from already-taxed salary. Unlike earnings on Roth 401(k) contributions, earnings on after-tax contributions are always taxable. 401(k) and 403(b) plans are allowed to offer after-tax contributions, but many do not.
One reason your plan may not offer after-tax contributions is because of IRS nondiscrimination rules. Those rules limit the amount of after-tax contributions that a high-paid employee can make, based on the amount that low-paid employees make. Since high-paid employees are the ones most likely interested in making after-tax contributions, the nondiscrimination test is often difficult to pass.
However, after-tax contributions always work for solo 401(k) plans because those plans aren’t subject to nondiscrimination rules.
If your plan offers after-tax contributions, you can potentially put away large amounts. You are limited in the amount of elective deferrals (pre-tax and Roth) you can make in any calendar year (for 2025, $23,500; $31,000 if age 50 or older; and $34,750 if ages 60-63). Importantly, after-tax contributions do not count against this limit. Those contributions, along with elective deferrals and employer contributions (such as matches), do count against another annual dollar limit. But that dollar limit is much higher – for 2025, $70,000, and even more if you’re older. So, even if you’ve maxed out on pre-tax and Roth contributions and have received an employer contribution, you’ll likely still have enough room to make substantial after-tax contributions.
As mentioned earlier, the downside to after-tax non-Roth contributions is that earnings are always taxable. However, your plan may allow you to move your after-tax funds into a Roth account before you accumulate considerable earnings. This can be done through either an in-plan Roth conversion or the “mega backdoor” Roth option.
In-Plan Roth Conversion
An in-plan Roth conversion allows you to convert your after-tax dollars (and any other non-Roth dollars) into the 401(k) plan’s Roth account. You’ll pay taxes on the earnings in the year of the conversion, but the Roth account can later be withdrawn tax-free or rolled over to a Roth IRA. The mega backdoor Roth strategy allows you to move after-tax 401(k) funds directly from the plan into a Roth IRA. Once again, you’ll pay taxes on any earnings, but withdrawals from the Roth IRA down the road can be tax-free.
Split Tax-Free Rollover
If you still have after-tax contributions in the 401(k) when you leave employment, you can do a split tax-free rollover. This allows you to roll over the after-tax contributions themselves (and any Roth 401(k) funds) to a Roth IRA, while rolling over pre-tax dollars, including earnings on after-tax dollars, to a traditional IRA.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.