With the popularity of Roth 401(k) contributions, after-tax (non-Roth) employee contributions have gotten short shrift. But, if your plan offers them, after-tax contributions are worth considering. They can significantly boost your retirement savings and can sometimes be funneled into Roth accounts while you’re still working.
After-tax contributions are contributions you make from already-taxed salary. Unlike earnings on Roth 401(k) contributions, earnings on after-tax contributions are always taxable. 401(k) and 403(b) plans are allowed to offer after-tax contributions, but many do not.
One reason your plan may not offer after-tax contributions is because of IRS nondiscrimination rules. Those rules limit the amount of after-tax contributions that a high-paid employee can make, based on the amount that low-paid employees make. Since high-paid employees are the ones most likely interested in making after-tax contributions, the nondiscrimination test is often difficult to pass.
However, after-tax contributions always work for solo 401(k) plans because those plans aren’t subject to nondiscrimination rules.
If your plan offers after-tax contributions, you can potentially put away large amounts. You are limited in the amount of elective deferrals (pre-tax and Roth) you can make in any calendar year (for 2025, $23,500; $31,000 if age 50 or older; and $34,750 if ages 60-63). Importantly, after-tax contributions do not count against this limit. Those contributions, along with elective deferrals and employer contributions (such as matches), do count against another annual dollar limit. But that dollar limit is much higher – for 2025, $70,000, and even more if you’re older. So, even if you’ve maxed out on pre-tax and Roth contributions and have received an employer contribution, you’ll likely still have enough room to make substantial after-tax contributions.
As mentioned earlier, the downside to after-tax non-Roth contributions is that earnings are always taxable. However, your plan may allow you to move your after-tax funds into a Roth account before you accumulate considerable earnings. This can be done through either an in-plan Roth conversion or the “mega backdoor” Roth option.
An in-plan Roth conversion allows you to convert your after-tax dollars (and any other non-Roth dollars) into the 401(k) plan’s Roth account. You’ll pay taxes on the earnings in the year of the conversion, but the Roth account can later be withdrawn tax-free or rolled over to a Roth IRA. The mega backdoor Roth strategy allows you to move after-tax 401(k) funds directly from the plan into a Roth IRA. Once again, you’ll pay taxes on any earnings, but withdrawals from the Roth IRA down the road can be tax-free.
If you still have after-tax contributions in the 401(k) when you leave employment, you can do a split tax-free rollover. This allows you to roll over the after-tax contributions themselves (and any Roth 401(k) funds) to a Roth IRA, while rolling over pre-tax dollars, including earnings on after-tax dollars, to a traditional IRA.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Resources
Contact Us
Investment advisory services offered through Donato Wealth Management, PLLC, dba Empower Wealth Management and Empower Wealth & Tax (“Empower Wealth Management” or “EWM”),
an SEC registered investment adviser that only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The firm is not engaged in the practice of law or accounting.
The information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional adviser before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned, or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Personal investment advice can only be rendered after the engagement of EWM, execution of required documentation, and receipt of required disclosures. All investment and insurance strategies have the potential for profit or loss. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. Past performance is no guarantee of future results. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD #305031.
Insurance products and tax services are offered through Senior Tax and Insurance Advisors, PLLC, dba Empower Wealth Group (“Empower Wealth Group” or “EWG”). Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products offered through EWM. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. EWG is not affiliated with or endorsed by the U.S. Government, Social Security Administration, nor the federal Medicare program. You may be contacted by a licensed insurance agent. Calling the number above will direct you to a licensed insurance agent. EWG may not offer every plan available in your area. Any information provided is limited to plans available in your area. Please contact Medicare.gov or 1-800-MEDICARE.
EWM and EWG are both affiliated companies of Empower Wealth, LLC (“Empower”). Investment adviser representatives of EWM may have a financial incentive to recommend tax and insurance products and/or services offered through EWG which presents a conflict of interest. This conflict is addressed by EWM’s adoption of its Code of Ethics, which requires that all EWM’s Associated Persons place the interest of clients ahead of their own. Clients of EWM are also free to choose their own tax and/or insurance professionals and are under no obligation to utilize the services offered through any related entities or persons associated with Empower.
Strategic Partners listed on this page are not employees of EWM and are not affiliated through common ownership.
We do not offer every plan available in your area. Any information we provide is limited to those plans we do offer in your area. Please contact Medicare.gov or 1-800-MEDICARE to get information on all of your options.
© Empower Wealth Management All Rights Reserved.
