After-Tax 401(k) Contributions: A Guide for How They Work
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If you’ve reached your 401(k) annual contribution limit, you’re probably a super saver. The good news is, if you have additional dollars at your disposal, you may be able to add them to your 401(k) account using after-tax contributions.
What is an after-tax 401(k)?
An after-tax 401(k) is when you put money you’ve already paid taxes on into your 401(k) account to save more for retirement. The main appeal of the after-tax 401(k) plan is that those contributions grow tax-free, similar to a Roth IRA or a Roth 401(k). And like those plans, qualified withdrawals are tax- and penalty-free.
The catch is that not all 401(k) plans allow after-tax contributions.
How after-tax 401(k) contributions work
Say you have a traditional 401(k) plan at work, and you make contributions through payroll. The annual contribution limit is $23,000 in 2024 and $23,500 in 2025. (In 2024 and 2025, people age 50 and older can contribute an extra $7,500 as a catch-up contribution. In 2025, due to the Secure 2.0 Act, those ages 60 to 63 get a higher catch-up contribution of $11,250.) Your employer might match a percentage of your contribution.
If your contributions and your employer match don't add up to the overall annual limit of $69,000 in 2024 ($70,000 in 2025), or your total limit with catch-up dollars, you may be able to keep adding post-tax money to your 401(k) until you get to that amount.
Let’s put these numbers into perspective using an example.
Rachel earns $100,000 and has a 401(k) account at work. She contributes $23,000 in 2024, the maximum for that year. Her employer offers a 100% employee match, up to 6% of her annual salary, which comes up to $6,000. This means Rachel now has $29,000 in her 401(k). Because the overall annual 401(k) limit for 2024 is $69,000, and because her employer’s 401(k) plan allows for after-tax contributions, she can put an additional $40,000 in after-tax dollars into her 401(k).
Not every employer provides an after-tax 401(k) contribution option, so check to see if it’s something you have access to. According to Vanguard’s How America Saves 2024 report, in 2023, 22% of Vanguard 401(k) plans had an after-tax contribution option.
Benefits of after-tax contributions
Vanguard’s report states that 9% of those surveyed who had access to after-tax 401(k) contributions made them, and they tended to have higher incomes. People in higher tax brackets can really benefit from using 401(k) after-tax contributions to save for retirement, says Christine Benz, Chicago-based director of personal finance at investment research firm Morningstar.
“High-income people who have run out of receptacles to save in, they should absolutely take advantage of this maneuver,” she says.
If you are a high earner, another reason to consider after-tax 401(k) contributions is that unlike the Roth IRA, there are no income restrictions on making after-tax 401(k) contributions.
You can also withdraw your after-tax contributions without penalty or taxes. Your earnings on those contributions grow tax-deferred, but if you take those out, you do have to pay taxes. If you’re younger than 59½, you may also have to pay a 10% penalty when you withdraw.
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Strategies for after-tax 401(k) contributions
We’ve established that you may be able to fatten up your 401(k) by adding after-tax contributions. But there is a caveat: Any earnings you make on those contributions are taxable. To minimize your taxes, you might consider rolling your after-tax contributions into a Roth IRA and the earnings into a traditional IRA (more on this later).
» Learn more about traditional IRA rules
Put contributions into a Roth
You may be able to put your after-tax contributions into a designated Roth account to ensure tax-free withdrawals during retirement. That is, as long as you wait until age 59½ to withdraw, and you make your first contribution at least five years before then.
There are two ways you can roll after-tax contribution dollars into a Roth account:
In-plan conversion: If your job offers an in-plan conversion, you can convert all or some of your 401(k) into a Roth. You have to pay taxes on any earnings, and any amount you haven't paid taxes on before. But, like with a Roth IRA, your withdrawals in the future would be tax-free. Some plans have an auto-convert feature that automatically converts your after-tax contributions into your Roth.
In-service withdrawal: If your employer offers in-service distributions or withdrawals, you can do a mega backdoor Roth. This is when you roll after-tax contributions into a Roth IRA outside of your retirement plan.
If your employer doesn’t offer in-plan conversions or in-service distributions on your 401(k) plan, you might consider asking what your options are for withdrawing money and putting it into an IRA. Make sure to ask about the rules associated with withdrawing money from your 401(k) and any potential penalties.
» Learn more about taxes on 401(k) withdrawals and contributions
Split between a traditional and Roth IRA to defer taxes
If you want to defer paying taxes on your after-tax contribution earnings, you can put the after-tax dollars into a Roth IRA because you’ve already paid taxes on it, and put your earnings into a traditional IRA. If you choose to split your contributions this way, you pay taxes on the earnings whenever you withdraw the money from your traditional IRA.
Let's say you made a $30,000 after-tax contribution to your 401(k). At the end of the year, when you check your account, you realize you made $1,000 in earnings. You could either roll the total sum, $31,000, into a Roth IRA and pay taxes on the $1,000 you earned, or you could put $30,000 in a Roth IRA and $1,000 into a traditional IRA. If you choose the latter, you don’t have to pay taxes until you withdraw from your traditional IRA during retirement.
» Dig deeper into tax-efficient investing
Are after-tax 401(k) contributions right for me?
If you’re a high earner and have maxed out your pre-tax 401(k) contributions, putting after-tax dollars into a 401(k) might be a good option for you to boost your retirement savings.
If you want investments to grow tax-deferred for retirement and would rather not open a brokerage account, this could fit your needs. Why might 401(k) after-tax contributions be better? “It tends to be a little more tax-efficient to save within the after-tax 401(k) because you’re getting the tax-free compounding and then the tax-free withdrawals in retirement, whereas if you have a taxable brokerage account, at a minimum, you’re paying some capital gains taxes when you sell appreciated securities,” says Benz.
If you decide not to do a rollover because your employer doesn’t offer in-plan conversions or in-service distributions, think carefully about whether after-tax contributions are right for you. If you leave your after-tax contributions to grow tax-deferred in your 401(k), you’ll have to pay taxes on any earnings once you withdraw them.
Benz says this type of retirement investing isn’t right for everyone.
“I think a key piece of advice is, unless you’re already making the fully allowable contribution to either a traditional or Roth 401(k), don't even think about after-tax 401(k) contributions. The other type of contributions will be more attractive from a tax standpoint than will be the after-tax 401(k).”
» Find the best Roth IRA accounts to roll your after-tax contributions into
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