After-Tax Contributions

After-tax contributions refer to the funds you contribute to a retirement plan, such as a 401(k), using income that has already been taxed. Unlike pre-tax contributions—which lower your taxable income for the year—after-tax contributions are made with post-tax dollars and do not offer an immediate tax deduction. However, these contributions can grow tax-deferred inside your retirement account.

A key advantage of after-tax contributions is their ability to be converted into Roth accounts, such as a Roth 401(k) or Roth IRA. Once converted, your contributions and their earnings can be withdrawn tax-free in retirement, provided you meet certain IRS qualifications. This conversion strategy is sometimes called the “mega backdoor Roth,” allowing high-income earners or savers who have maxed out traditional and Roth 401(k) contribution limits to accelerate tax-free retirement savings.

Comparing Contribution Types

Understanding after-tax contributions requires recognizing how they differ from pre-tax and Roth contributions:

• Pre-Tax Contributions reduce your current taxable income and grow tax-deferred but will be taxed as ordinary income upon withdrawal.
• Roth Contributions are made with after-tax dollars, grow tax-free, and qualified withdrawals are entirely tax-free.
• After-Tax Contributions are also made with after-tax dollars but do not grow tax-free unless converted to a Roth account via in-plan conversions or rollovers.

How After-Tax Contributions Work

If your 401(k) plan permits, you can contribute after-tax dollars beyond the regular elective deferral limits — increasing total annual savings capacity. These funds accumulate tax-deferred, and you may convert them into Roth accounts either within the plan or by rolling over to a Roth IRA. Converting early minimizes taxable earnings. This strategy enables savers to shelter more money from future taxes.

The Mega Backdoor Roth Strategy

The “mega backdoor Roth” leverages after-tax contributions plus in-plan conversions or rollovers to Roth IRAs, significantly boosting the amount you can grow tax-free. In 2024, total 401(k) contributions including employee pre-tax/Roth, employer match, and after-tax can reach $69,000 ($76,500 if age 50+). By maxing out standard contributions, you create room for after-tax contributions that can be converted to Roth dollars — these conversions are generally tax-free on the contributed amount, with taxes owed only on any earnings.

Eligibility and Considerations

To use after-tax contributions effectively:

• Confirm that your employer’s 401(k) plan allows after-tax contributions and in-plan Roth conversions or in-service rollovers.
• Maximize your pre-tax and Roth contributions first.
• Have additional savings capacity.
• Understand tax rules, including the pro-rata rule if you have other IRA assets, which can complicate conversions.

Tips for Success

• Act promptly to convert after-tax contributions to Roth accounts to minimize taxable earnings.
• Maintain detailed records of your contribution basis to avoid tax issues.
• Consult a financial or tax professional to navigate complex rules and optimize your strategy.

Common Misconceptions

After-tax contributions are not the same as Roth contributions and do not grow tax-free unless converted. Not all plans offer the necessary features for conversions, and ignoring tax implications like the pro-rata rule may lead to unexpected taxes.

Learn more about related topics such as Mega Backdoor Roth 401(k) and Roth 401(k) to deepen your retirement savings knowledge.

Additional Resources

For official IRS details and contribution limits, refer to the IRS website and publications. The IRS updates limits and rules annually, so staying informed is essential.