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After-tax 401(k) contributions are unfamiliar to most people since employers don’t typically offer the option. But, some employers do, and after-tax 401(k)’s may be gaining in popularity.

We were inspired to write about the topic based on the following question from a reader named Josh (submitted in 2016):

“I just started a new job this week and on the 401(k) information sheet I noticed that there was a column with additional after-tax contributions that you can make on top of the $18k contribution limit (In my case this is $20k). After maxing out my Roth IRA, Roth 401(k) and HSA, would it be better to put money into my 401(k) after tax than into a brokerage account? How is this money treated differently than normal Roth 401(k) contributions? It looks like it is now to convert this money into a Roth IRA… “

That’s an excellent question, and the quick – but inconclusive answer is – it depends! For Josh, it’s unlikely that he’ll be able to convert his after tax 401(k) contributions to a Roth IRA any time soon, but let’s consider the main points of the after-tax option.

What Are After Tax 401(k) Contributions?

After-tax 401(k) contributions are just what the name implies – 401(k) contributions that are made by the employee without the benefit of them being tax deductible.

Here’s how it works: Under current regulations, an employee may contribute up to $19,000 of pre-tax earnings to an employer sponsored 401(k) plan ($25,000 if you are age 50 or older). However, the maximum anyone may contribute to any and all tax-deferred retirement plans is $56,000 (or $62,000 if you are age 50 or older).

Considering only employees who are younger than 50, that means that even after making the maximum allowed tax-deferred contribution of $19,000, there is still the potential to contribute an additional $37,000 to your 401(k) plan. The IRS actually permits this, with certain restrictions, but relatively few employers offer it.

One of the major restrictions – and the reason that it isn’t more popular – is that the additional contributions beyond $19,000 are not tax deductible. Many taxpayers lose interest in contributing to a retirement plan if there is no deduction for doing so.

Next Steps

Why You Might Make After-Tax 401(k) Contributions

Even though you can’t deduct the contributions beyond $19,000, making them on an after-tax basis can still make a lot of sense. Once the additional contributions are added to your 401(k) plan, they accumulate investment income on a tax deferred basis, just like the funds in any other type of tax-deferred retirement plan.

In addition, contributing the maximum of $56,000 to your 401(k) plan is nearly three times the usual $19,000 limit. That will enable you to accumulate a lot more money before you retire. And, if you’re planning to retire well before turning 65, after-tax contributions will enable that to happen a lot faster.

There is a catch. The earnings on after-tax contributions, just like all distributions from pre-tax contributions, are taxed as ordinary income. If the money had been invested in a taxable account, most if not all of the gains would be taxed at the lower rate associated with long-term capital gains. But, there is still another advantage that could make after-tax 401(k) contributions irresistible.

The Roth IRA Rollover

This could quite possibly be the golden goose of the whole arrangement. Since your contributions in excess of $19,000 are made on an after-tax basis, you can convert the non-deductible portion of your 401(k) to a Roth IRA…and do so without incurring any income tax liability on the conversion!

Once you roll the funds over to a Roth IRA, you will be converting future withdrawals from tax-deferred to tax-free status.

Without even turning to a calculator, it should be obvious that this represents a tremendous windfall. Imagine if, instead of contributing $6,000 per year to a Roth IRA (the IRA contribution limit), you instead contribute effectively up to $37,000 per year in after-tax 401(k) contributions? Not only will you accumulate a fortune, but again, that produces income to you on a tax-free basis in retirement.

Recommended Reading: How to Open and Fund a Backdoor Roth IRA

This is even better than doing the standard Roth IRA conversion, since that tactic typically requires paying tax on the amount converted. Since you never received a tax deduction on your after tax 401(k) contributions, there will be no tax on the conversion.

The IRS allows you to rollover the amount of the after tax 401(k) contributions to a Roth IRA, while the amount of your accumulated investment earnings and pretax 401(k) contributions are rolled over into a traditional IRA (Source: Morningstar).

What About Regular Roth 401(k) Contributions?

The limitation with regular Roth 401(k) contributions is that in combination with contributions to your regular 401(k) plan, you cannot contribute any more than $19,000 per year in total. Using the after-tax 401(k) contributions, your contributions to a Roth plan can be dramatically higher.

What About Just Contributing to Regular Taxable Accounts Instead?

This is certainly a reasonable idea. In fact, before you even consider taking full advantage of after-tax 401(k) contributions, you should first make sure that you have a sufficient amount of money held outside of retirement savings to provide you with short-term liquidity, as well as for medium-term goals. Those goals include any spending plans that will need to be funded before you retire.

Only when you have a sufficient amount of savings and investments to handle those spending priorities should you consider putting additional money into after-tax 401(k) contributions.

Your after-tax 401(k) contributions should be something you do only when all other spending and retirement priorities have been met. Despite the obvious advantages of tax-deferred and tax-free investment earnings, you should always have an adequate amount of money held outside of your retirement plans that you can access quickly and easily if you need to.

How After-Tax 401(k) Contributions Work

Though employee contributions are limited to $19,000 (or $25,000) per year, you can actually contribute up to the overall plan maximum – which is the lesser of $56,000 or of 100% of your actual earnings.

It’s important to understand that rolling your after-tax 401(k) contributions into a Roth IRA is not at all an automatic process. While you are working for your employer, you contribute to your 401(k) using both pretax and after-tax contributions, and both will earn investment income on the tax-deferred basis.

In order to be able to roll over your after-tax contributions to a Roth IRA, you generally must separate from your employer -either through retirement or through resignation/termination. (Some companies allow in-service rollovers, but it’s not common. See below for more details.) Once you do the funds will be released to you, as is normally the case with employer-sponsored retirement plans.

You will then have to calculate after-tax contributions that you made to the plan.

Typically, pretax contributions and your overall 401(k) plan investment earnings are rolled over into a traditional IRA, so there will be no immediate tax liability and funds will continue to be tax-deferred. Your after-tax 401(k) contributions can be rolled over into a Roth IRA – again with no tax consequences, since there was no tax deduction taken – and begin earning investment income on a tax-free basis.

As a rule, the most logical contribution sequence should be:

  1. Make the maximum pre-tax contribution you can (or at least sufficient to get the maximum employer matching contribution).
  2. This should include making the maximum Roth 401(k) contribution (so you can take advantage of tax-free earnings from the very beginning).
  3. Make the maximum after-tax 401(k) contribution.

Your after-tax 401(k) contributions will be included within your regular 401(k) plan, and will earn investment income on a tax-deferred basis. The real benefit, of course, will take place once you leave your employer. You can roll over the after-tax contributions into a Roth IRA, where the investment earnings will be tax-free.

This will also have benefits in the event that you take some or all of your 401(k) money directly after leaving employment, rather than rolling it over to an IRA. Since part of your 401(k) distribution will be comprised of non-deductible after-tax contributions, that portion will not be subject to income tax upon withdrawal.

There is a special provision of the tax code – IRC Section 402(c)(2) – that allows you to get your after-tax contributions back immediately if you are retired.

For example, if you have $500,000 distributed from your 401(k) plan when you retire, and $100,000 of it represents after-tax 401(k) contributions, you have the option to receive that after-tax contribution amount in a lump sum with no tax consequences. The remaining balance of the plan can be rolled over into an IRA.

In-service transfers. This is something of a long-shot, but if your employer allows you to make in-service transfers from your 401(k) plan to an IRA, you may be able to begin converting your after-tax 401(k) contribution money to a Roth IRA without terminating your participation in the 401(k) plan. Most companies do not offer this option, nor are they required to by law, but it’s certainly worth investigating. If it is permitted, you can begin taking advantage of tax-free investment earnings in your Roth IRA rollover account immediately, rather than waiting until you leave the company.

How to Know If Your Employer Allows After Tax 401(k) Contributions?

Despite the fact that after-tax 401(k) contributions are permitted within the tax code, employers are not required to offer the benefit. In fact, a report in Kiplinger’s noted that probably no more than 10% of employer-sponsored 401(k) plans actually allow it.

If you’re not sure if your employer is one of the participants, contact whoever in the organization is the contact point on the 401(k) plan and start asking questions. It may very well be that your employer does allow it, but doesn’t necessarily make that common knowledge.

If they don’t offer it, you may want to see if you can initiate some interest. Be prepared to not only explain how the program works, but also how it will give the employer a competitive edge in retaining staff and in recruiting new talent. Since only a minority of employers allow it, this could be a major retention and recruiting tool that will benefit the employer.

Further Reading:  How much should you be saving for retirement

Author Bio

Total Articles: 171
Since 2009, Kevin Mercadante has been sharing his journey from a washed-up mortgage loan officer emerging from the Financial Meltdown as a contract/self-employed “slash worker” – accountant/blogger/freelance blog writer – on OutofYourRut.com. He offers career strategies, from dealing with under-employment to transitioning into self-employment, and provides “Alt-retirement strategies” for the vast majority who won’t retire to the beach as millionaires.

Article comments

Mike D says:

Kevin – Question: At age 59 1/2, is there any way that I can draw out my 401K before-tax account holdings, without incurring taxes and penalties, and without rolling it into an IRA? I want to be able to obtain the funds and invest them as I see fit, without turning them over to a broker or financial institution, where I am forced to pay out a commission or fee when making investments through them. I understand that I will have to pay commissions when I make security purchases regardless of whether I place the order, or someone places the order in my behalf. But, I want control of MY money and want to minimize the fees I pay. Additionally, I also understand the risk involved in making my own investment decisions, but feel I have the education needed to handle my monies in a responsible, diversified manner. Do you know the legalities on this rollover issue?

Rob Berger says:

Mike, you can transfer a 401k to an IRA where you completely control the investment options. In your question, however, you say you don’t want to put it into an IRA. If you take the money out of a 401k and move it into a taxable account, it will be treated as ordinary income regardless of your age. There are some options for avoiding the 10% penalty, but not the taxes unless you roll it into an IRA.

Tony says:

One little glitch in this employee contribution that I didn’t see mentioned. To roll it over into a Roth it has to be done while employeed by the company which most companies will not allow. Thus it will be taxed as ordinary income.

Evan says:

That is incorrect. You are referring to an in-service rollover, which most companies that have after-tax options don’t allow. Most ways to move the after-tax contribution into the Roth IRA is when you resign/separate from the company. If you roll over the contribution into a Roth there is no tax liability. Make sure to separate the investment gains from the actual contribution. The contribution goes into a Roth and the investment gains go into a traditional IRA(tax deferred).

Lawrence Reed says:

I make about 80k per year sometimes 100K. My company matches pre-tax and after-tax. I am 52 and will retire in about 11 years from now. I currently have 25k in a Roth, 55K in an IRA, 102K in 401K, 15k in cash and 20K in physical silver saved up. I have a rental that currently pays what is owed on mortgage for next 10 years @ 700/month (worth 80k) will receive pension of about 2.5k per month plus about 1.4k in SS when I retire. I put in max match allowed 7% and their 3.5%. Should I make pretax or after tax? (in 2015 I moved out what I could from the 401K into my Roth and my regular IRA)
Thank you for your time

Bob N says:

It’s great to know that when I retire, I can move my after-tax 401K contributions over to a Roth IRA and continue to enjoy tax-free earnings, or I can receive the cash with no tax consequences should I need money for an expense. Two questions 1) Is the amount one can roll over limited in any way by one’s income level, like regular Roth IRA contributions are? 2) Is it just the after-tax contributions that can be rolled over, or is it contributions plus their earnings realized in the 401K?

Don says:

Hello! Just came across this article as I’d just recently heard about after-tax contributions. One question – it’s still required to follow the 401k rules in that I can’t withdraw it until 59.5, right?

Joseph Coover says:

It would be treated like doing a roth covernsion, you wait 5 years than you can pull out the original amount without penalty. However, any earnings in that 5 years would have to wait until you are 59.5 years old. For example, if you changed jobs, and put $10,000 after tax contributions into a roth IRA, lets say in 5 years it increases to $12,000. You can pull out the $10,000 at any time because they are considered contributions.

Robert says:

Hmmm… I don’t think that is true. It is NOT a conversion. It’s considered a rollover contribution. There are different tax consequences between the two.

David Gross says:

I am 61 and have been retired for 4 years. Currently rolling over 401k. After tax going to Roth, 20% to my broker, company stock to my a schwab IRA and the remainder had to be cashed out goes to Schwab. Had looked at NUA and opted against. Of the after tax, $55k is a gain. I need to pay tax on that. I was hoping it will be coded as a long term gain but am afraid it will be coded as income ie my 2018 tax rate. Is that true? Thanks

Joshua says:

This is great. I dont make much (40k/yr) but I started stuffing my 401k. I’m a bit late to the party (33 year old) but I want to have a nice 401k. I’m currently contributing 15%(10%pre 5%after-tax). I’m doing it this way because I would take my after-tax in lump sum and withdraw my pretax over time. My job offers a pension also and hope SS is still around at my retirement. Anyways is this a good strategy for me? I’ve read it’s better to do pretax if ur not at max, but I kinda like the lump sum idea without worrying to pay income tax and raise my tax rate. I hope to retire around 60-62

Pete Cal says:

I am retired and rolled my 401k to a traditional IRA a few years ago. I didn’t know that I could have rolled the post tax amount to my Roth IRA. Can I do that now or am I out of luck. Note, I took a RMD in 2018 for the first time.

Rena Breeding says:

Looks like you (re)posted this article in 2019 but the limits quoted are much older limits. The current limits are $56,000 plus an additional $6,000 if Age 50 or older. This article does not take into account if the employer is making a contribution, such as matching or profit sharing. The maximum limits must be reduced for any employer contribution or forfeiture reallocated to a participant’s account.

Michael Hudick says:

My wife’s 401(k) allowed her to make after tax contributions. There was no ROTH component to her 401(k). However, her W-2, box 12b, lists her after tax 401(k) contributions and codes them AA. This crates a big problem. The IRS instructions for W-2 does not deal with after tax contributions to a 401(k) so I am thinking that these do not go on the W-2. Is this correct?

kunal says:

Please take a look at your wife’s 401k plan prospectus again. Code AA in Box 12b is for Roth 401k contributions.

Alice L Llup says:

There is a fundamental problem with the tax code and after-tax 401K contributions. If you withdraw your after-tax contribution from your 401K, it is listed as ordinary income, and add to the AGI. So if your after tax take home pay is 100K, and you put 10K of that, in a 401K after taxes, the IRS list your take-home income as 110K, instead of 100K, which is ridiculous!

Ster says:

Great Article, Thanks a million.
Two Things:
1. Could you please expand on your understanding about “There is a special provision of the tax code – IRC Section 402(c)(2) – that allows you to get your after-tax contributions back immediately if you are retired.” I read the code and it was over my head. I’d like to retire from a Fire Department (at 45) and I could have a few hundred thousand in 401(a) post tax contributions by then, and
2. When the post tax contributions will be available once it is rolled into a Roth IRA. It is in a roth, and it is contributed funds, one would think it would be available immediately.

John says:

Hi, good article, good information. I’m pleased to say the we have After Tax option in our 401k, with an in-service withdrawal option for After Tax contributions only. This allows me to roll the principle into a Roth IRA, and earnings into a Rollover IRA. My question is, does after tax have to be made after regular 401k contributions, or can only after tax only contributions be made instead? If I do max out the 415 limit using after tax, can I still make my catch up contribution, or will it be re-characterized, and cause my after tax amount to be reduced?

AlamaPaul says:

It applies after you reach the maximum regular maximum 401K contribution. Otherwise, you simply contribute to your plan’s Roth 401k, if it’s available…

Tanner says:

I am changing employers and my new employers 401k plan doesn’t allow After Tax funds. I have 31,000 in my 401k and 9,000 of it is after tax funds. So if I just cash that amount out I know I won’t be taxed since I already paid the taxes, but will I have to pay the early withdrawal penalty of 10% since I am not 59.5? I read on another site that the penalty is only for tax deferred funds. Thanks.

Michael says:

Thanks for the great article!
You made a comment that the maximum 401k contribution for “any and all” plans is 56K. It was my understanding that the employee contribution (19K) is limited across all 401k accounts held by the same person. The employer match or after tax contributions are limited per each individual plan. This allows one to contribute to multiple 401k plans.

Currently I maximize an employer plan (which allows after tax contributions and rollovers)
25K pretax employee contribution
11K employer match
26K after tax contribution

Additionally, I have a solo 401k for my self-employed business which I also maximize:
56K after tax contribution followed by Roth conversion.

Additionally, my employer plan allows me to roll the after tax dollars into my Roth solo 401k. The solo 401k allows investments in “alternatives” like real estate, precious metals, life settlements, etc.

Ken patel says:

I was looking for this kind of plan which
Would allow 112000 in retirement
I like to learn more if possible

kathryn stephens says:

I participate in a Roth 401K at work – I make non-deductible contributions, will the earnings on these after tax contributions be taxable since this is a roth 401K when I rollover to my roth ira?

Drew Cross says:

No, your roth 401k works just like a roth IRA and grows tax free after your contributions.