Key takeaways
- An after-tax 401(k) lets you contribute taxable dollars to an employer retirement plan once you’ve reached your annual limit.
- You won’t get an immediate tax break with an after-tax 401(k), but you’ll enjoy tax-deferred growth on that extra money.
- Withdrawals can be taken tax-free since the money was taxed already.
An after-tax 401(k) gives you the ability to supersize your retirement contributions, helping you reach your investment goals even faster. You can still have an after-tax 401(k) even after you’ve maxed out your traditional or Roth 401(k) contributions for the year, if your employer allows it.
Here’s how an after-tax 401(k) works, and what you need to know to see if it’s right for you.
How an after-tax 401(k) works
An after-tax 401(k) allows savers to put after-tax money into a 401(k) account, and that money can grow on a tax-deferred basis until retirement. When it comes time to take a distribution, contributions can be withdrawn tax-free, since tax has already been paid on them. Meanwhile, any earnings on that money will be considered taxable and will be taxed as ordinary income.
An after-tax 401(k) may sound like it’s a Roth 401(k), which also uses after-tax money, but don’t confuse the two. The Roth 401(k) offers different tax advantages.
After-tax 401(k) contributions
You can add a lot more to an after-tax 401(k) than in a regular 401(k) plan. In a regular 401(k), employee contributions are limited to $23,500 for 2025 for those under age 50, $31,000 for those 50 and older, or $34,750 for workers 60-63. But the after-tax 401(k) plan allows you to contribute up to a combined total of $70,000 for 2025, $77,500 for those age 50 and older, or $81,250 for those 60-63, including any employer matching funds.
Many 401(k) plans allow you to contribute to an after-tax 401(k) plan at the same time as you’re contributing to your regular401(k) plan. But the after-tax plan’s advantages are not quite as strong as ones offered by the regular plan. So an after-tax 401(k) works best for those who are able to max out their contributions to a traditional or Roth 401(k) and want to stash more money in a retirement plan.
The catch is whether your employer offers the after-tax 401(k) — and many employers do not, even if they offer a traditional or Roth 401(k) plan.
After-tax 401(k) benefits
The after-tax 401(k) is an extension of many of the benefits that already exist in the regular 401(k) retirement account, but it also offers additional perks:
- Contributions are pulled directly from your paycheck. Just like your regular 401(k) contributions, you can have contributions to your after-tax 401(k) automatically deducted from your paycheck, making it easier to participate.
- Tax-advantaged growth of your contributions. The after-tax 401(k) allows your contributions to grow on a tax-deferred basis. When you withdraw money in retirement, you’ll be taxed only on the earnings, not the contributions.
- Expands the 401(k) contribution maximum. If you’re looking to put away more into a tax-advantaged retirement account, the after-tax 401(k) lets you do it. You can contribute up to $70,000 annually (for 2025), $77,500 if you’re age 50 or older, or $81,250 if you’re 60-63, including any employer matching funds.
- Pre-selected investment funds. Just as you do in your regular 401(k), you’ll be limited to whatever investment choices are available in your specific plan. Your plan may offer some of the best investment funds, but it may not.
- After-tax 401(k) contributions can be withdrawn at any time with no tax or penalty. Unlike the rigid rules on withdrawals in a regular 401(k), the after-tax 401(k) allows you to withdraw contributions at any time without tax or penalty, giving you a lot of flexibility.
- The plan is portable. Like your regular 401(k), you’ll be able to move your after-tax 401(k) to a new employer or to another retirement plan.
- After-tax contributions can be rolled over into a Roth IRA. One of the advantages of the after-tax 401(k) is that you can roll over your contributions to a Roth IRA, potentially even while you’re still with your employer. Experts routinely call the Roth IRA the best retirement account available.
- No income limits on participation. Unlike the IRA, the after-tax 401(k) does not have an income limit, so regardless of what you earn, you’ll be able to participate if your employer offers the plan.
The ability to roll over your after-tax 401(k) contributions to a Roth IRA while still with your employer — called an “in-service rollover” — is a valuable feature that effectively allows you to stash more money in your Roth IRA, and you can do so in some cases with minimal tax consequences, too. This rollover allows you to create a “mega-backdoor Roth IRA,” and the move occasionally finds itself in the crosshairs of Congress. It could be eliminated in the future, though the subject remains up for discussion.
Eligibility and availability of after-tax 401(k) plans
Your ability to contribute to an after-tax 401(k) plan depends on whether your employer offers this special feature, and most companies don’t. As of 2023, just 22 percent of companies offered an after-tax 401(k) plan, according to Vanguard. Check with your company’s HR department to see if it’s available.
If you decide the after-tax 401(k) is right for you, you’ll need to set up the plan with your 401(k) administrator.
How after-tax 401(k) contributions can be converted to a Roth IRA
One of the advantages of an after-tax 401(k) is that you can convert the plan into a Roth IRA, letting you get much more money into that account than you otherwise could. You can convert your after-tax 401(k) to a Roth IRA by contacting your HR department or your 401(k) administrator. Normally, you would roll over a 401(k) account after you leave your company. However, many companies with an after-tax 401(k) let you perform a rollover while you’re still employed. This feature can be advantageous (more below).
As you’re considering whether to roll over your after-tax 401(k), you’ll need to know whether your plan permits in-service rollovers and partial rollovers, since those affect what tax will be due immediately as part of the rollover and what may be deferred until later. In-service rollovers and partial rollovers give you a lot of flexibility to decide when you want to realize the impact of any tax liability.
Tax implications of rolling over after-tax 401(k) contributions
If you’re considering rolling over an after-tax 401(k) — or any 401(k) account — to an IRA, you’ll want to pay particular attention to the tax impact of doing so. While contributions to an after-tax 401(k) are not taxable in a rollover, any earnings that are rolled over to a Roth IRA are taxable. Some plans may require you to roll over your entire 401(k) balance, including pre-tax amounts from a traditional 401(k), while others may allow you to perform a partial rollover of just the after-tax amounts.
In general, any money that hasn’t been taxed before it’s gone into the 401(k) is taxable when the money is rolled over to a Roth IRA, which is a post-tax account. Any rollovers of untaxed money will be taxed at ordinary income tax rates.
For example, you’ll generate a tax liability when you roll over any of the following kinds of money to a Roth IRA:
- Earnings in an after-tax 401(k) plan (but not contributions)
- Any money from a traditional pre-tax 401(k) plan, either earnings or contributions
- Any 401(k) employer match that’s been deposited to a pre-tax 401(k)
Any contributions to a Roth 401(k) and earnings on it are not subject to tax when converted to a Roth IRA, since tax has already been paid on this money.
An in-service rollover provides an extra benefit. By conducting an in-service rollover regularly rather than waiting to leave the company after a number of years, you can roll over your money to the Roth IRA before it’s earned a lot, reducing the amount in taxes that you’ll pay as part of the conversion. You’ll get your contributions into the Roth IRA before they’ve earned as much, reducing your tax liability on the conversion.
A partial rollover may allow you to transfer only the after-tax amount, letting you keep the otherwise taxable portion of your 401(k) in the account and deferring the tax. In addition, some after-tax 401(k) plans may allow you to transfer otherwise taxable amounts, such as contributions, to a traditional IRA, which is a pre-tax plan. This strategy can help you avoid the immediate tax impact of a rollover, but you’ll still eventually owe taxes on money withdrawn from the IRA.
Can I contribute to an after-tax 401(k) and another 401(k)?
You can contribute to an after-tax 401(k) and another 401(k) or many other 401(k) plans. The key point to remember is that your contributions as an employee may not exceed the annual cap on total contributions, which is $23,500 for 2025, $31,000 for those age 50 and older, or $34,750 for workers age 60-63. If your employer has set up an after-tax 401(k), then you can go up to its higher limit.
On top of that employee contribution, you may make contributions as an employer, for example, if you’re self-employed and have a solo 401(k) or are able to participate in profit-sharing plans.
Between your employee contribution, your after-tax contribution and your employer contribution or match, you are limited to an annual maximum of $70,000 for 2025, $77,500 for those age 50 and older, or $81,250 for those 60-63.
Should I make after-tax 401(k) contributions?
After-tax 401(k) contributions could make sense for savers in higher tax brackets who have exhausted their other tax-advantaged savings options. Because there are no income limits associated with after-tax 401(k) contributions, higher earners can take advantage.
Not all 401(k) plans allow after-tax contributions. In that case, higher earners often have to turn to taxable brokerage accounts to save beyond the 401(k) limits they’re eligible for. An after-tax 401(k) beats a standard taxable brokerage account in that it offers tax-deferred growth.
Bottom line
An after-tax 401(k) is great if you want to stash away more cash each year in a tax-advantaged retirement account, and it can help you reach your retirement goals sooner. As you’re planning, however, make sure that the 401(k) offers investments that meet your needs, or you may end up putting money into the wrong investment just to get a tax advantage from the account.
FAQs
— Maurie Backman contributed to an update of this article.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
Read the full article here
