After-Tax 401(k) Contributions & How They Work

Mar 6

Retirement planning is one of the most important aspects of financial planning, but even some informed investors aren't familiar with after-tax 401(k) contributions and their potential benefits. Here’s everything you need to know in this respect including what they are, how they work, and how they differ from Roth IRAs.

What are after-tax 401(k) contributions, and how do they work?

Let’s start with a quick refresher on how traditional 401(k) contributions work. First and foremost, they're made with pre-tax dollars: meaning money contributed to your 401(k) is deducted from your paycheck before income taxes are applied, lowering your taxable income for the year and potentially reducing your tax bill.

Contributions grow tax-deferred—meaning you won’t pay taxes on earnings until withdrawing the money in retirement—and withdrawals, including both contributions and any investment earnings, are taxed as ordinary income. This deferred taxation is sometimes advantageous if you expect to occupy a lower tax bracket in retirement than during your working years.

In contrast, after-tax 401(k) contributions—an option within some employer-sponsored retirement plans—allow employees to contribute money to a 401(k) after income taxes are already deducted. As these after-tax contributions are made from already-taxed income, they don't reduce taxable income for the year; but you can withdraw the principal (amount contributed) tax-free in retirement, though any investment earnings on these after-tax contributions is taxed upon withdrawal.

After-tax 401(k) contribution advantages

Though after-tax 401(k) contributions don't reduce your taxable income for the year and therefore don’t offer an immediate tax benefit, they do have several other potential advantages for some savers that include…

The ability to save beyond standard contribution limits

One of the main benefits of making after-tax contributions to a 401(k) is the ability to save more money in a tax-advantaged account. For the year 2025, the contribution limit for pre-tax salary deferrals to a 401(k) is $23,500. For individuals aged 50 and older who qualify for catch-up contributions, the limit increases to $31,000. Additionally, those between the ages of 60 and 63 can contribute up to $34,750.

However, the overall limit for all 401(k) contributions—including after-tax contributions and employer matches—is $70,000, plus any eligible catch-up contributions. After-tax contributions therefore allow you to save up to an additional $46,500 ($54,00 for those 50-59 or 64+ and $57,750 if you’re between 60 and 63), a feature particularly beneficial for high-income earners looking to maximize their retirement savings.

Tax-free withdrawals on principal

When you make after-tax 401(k) contributions, the money contributed (the principal) has already been taxed—meaning you won’t owe taxes on it again upon withdrawing it in retirement. These tax-free withdrawals can provide a source of tax-free income during retirement, adding flexibility to retirement planning.

The opportunity for Roth conversions (mega backdoor Roth)

Investors can strategically employ after-tax 401(k) contributions to execute a "mega backdoor Roth IRA" conversion, which involves rolling over after-tax contributions into a Roth IRA: where both the principal and any future earnings can grow (and be withdrawn) tax-free in retirement. This strategy allows you to increase tax-free retirement savings beyond standard Roth IRA contribution limits, making it an attractive option for those seeking to optimize their tax-advantaged savings.

Additionally, after-tax 401(k) contributions converted to a Roth IRA are not subject to required minimum distributions (RMDs) during one's lifetime—often a significant advantage for those who want to keep their retirement savings invested for as long as possible or plan to pass on assets to heirs.

It's important to note that Congress has discussed eliminating mega backdoor Roth IRA conversions altogether, so it's possible this option won’t stick around in the future.

After-tax 401(k) contribution disadvantages

As with any investment option, after-tax 401(k) contributions have potential disadvantages as well—some of which are more relevant to a specific slice of investors than others—and include…

No immediate tax benefits

Unlike with pre-tax 401(k) contributions, after-tax contributions don't reduce your taxable income for the year: making them not as appealing for some individuals looking to lower their current tax bill.

Taxation on earnings

While the principal from after-tax contributions is withdrawn tax-free, any investment earnings on these is taxed as ordinary income when withdrawn unless rolled over into a Roth IRA—with this tax sometimes watering down the overall benefit of after-tax contributions.

Complexity and limited availability

Not all employer-sponsored 401(k) plans offer the option of after-tax contributions, so availability is sometimes limited. Additionally, managing after-tax contributions—especially if you plan to execute a Roth conversion—can add complexity to your financial planning and requires careful coordination to avoid potential tax pitfalls. Working with a financial advisor is thus often recommended.

Contribution limits and account coordination

While after-tax contributions give you the means to exceed standard contribution limits, you must coordinate them with employer contributions to stay within the overall 401(k) limit: requiring careful tracking to ensure you don’t inadvertently exceed the allowable amount and thus summon tax penalties.

After-tax 401(k) vs. a Roth IRA

If you’re familiar with Roth IRAs, you may wonder how an after-tax 401(k) differs from this well-known retirement savings vehicle. While both of these options allow you to contribute already-taxed money (with the potential for tax-free withdrawals in retirement), key differences do in fact exist. These include…

Contribution limits

As a reminder, the overall limit for all 401(k) contributions in 2025 (including after-tax contributions and employer matches) is $70,000 (plus catch-up contributions). In contrast, Roth IRA contributions are limited to $7,000 ($8,000 for those over the age of 50).

Tax treatment

While both Roth IRA and after-tax 401(k) contributions are made with after-tax dollars (with the principal growing tax-free), any investment earnings on 401(k) accounts are subject to taxes when withdrawn. This is not the case with a Roth IRA, for which both the principal and earnings are tax-free when withdrawn—providing a significant tax advantage for those who expect to occupy a higher tax bracket in retirement.

Eligibility and income limits

So long as your employer offers 401(k) after-tax contributions, you can indeed contribute regardless of income. Roth IRA income limits, meanwhile, dictate eligibility. For 2025, single filers with a modified adjusted gross income (MAGI) exceeding $165,000 and married couples filing jointly with a MAGI above $246,000 are ineligible to contribute directly to a Roth IRA.

Employer involvement

A 401(k) is an employee-sponsored plan that has both potential pros and cons. For example, the framework of the plan is subject to the rules/availability of your specific 401(k) plan, and many employers don’t offer the option of 401(k) after-tax contributions. On the other hand, you could boost your retirement savings if your employer offers any sort of matching contributions. As Roth IRAs are individual retirement accounts and thus not tied to your employer, meanwhile, these give you complete control but in the absence of employer contributions.

Who should make after-tax 401(k) contributions?

As we’ve seen, after-tax contributions offer unique benefits including the ability to save beyond standard contribution limits and strategic tax planning opportunities in some cases; but these contributions are indeed not suitable for everyone. Here’s a look at the types of investors who may find after-tax 401(k) contributions most beneficial…

High-income earners looking to maximize retirement savings

One key advantage of after-tax 401(k) contributions is higher annual contribution limits. For those who've already contributed the maximum amount to other tax-advantaged accounts (e.g., IRAs, HSAs, or pre-tax 401(k) plans), after-tax 401(k) contributions offer an additional avenue to save more for retirement without relying solely on taxable accounts.

Those who cannot contribute to a Roth IRA due to income limits

One of the most compelling reasons to make after-tax 401(k) contributions is the ability to execute a mega backdoor Roth IRA conversion, a strategy allowing you to convert after-tax contributions to a Roth IRA wherein both the principal and any future earnings can grow and be withdrawn tax-free.

This strategy is particularly beneficial for high-income earners who are unable to contribute directly to a Roth IRA due to income limits. By utilizing after-tax 401(k) contributions and converting the same to a Roth IRA, these investors can effectively bypass income restrictions and build substantial tax-free savings for retirement.

Savers who anticipate occupying a high tax bracket in retirement

After-tax 401(k) contributions are often a strategic way to manage future tax liability for these specific savers, ensuring them tax-free income in retirement—potentially reducing higher tax bracket impacts—thanks to after-tax contributions later converted to a Roth IRA.

This strategy also offers protection against potential tax law changes; if you believe tax rates will likely increase in the future, you can convert after-tax contributions to a Roth IRA now to lock in current tax rates and avoid higher taxes on retirement income later.

The takeaway: after-tax 401(k) contributions

Before deciding if after-tax 401(k) contributions are right for you, it’s important to weigh the advantages and disadvantages and consider how they fit into your overall retirement plan. Consulting with a financial advisor can help you make the most of these benefits while minimizing any potential downsides.

Have questions about after-tax 401(k) contributions? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.