401k After-Tax Contributions: How Do They Work?

After-tax 401(k) contributions represent a savings avenue for those aiming to bolster their retirement funds beyond typical limits. These contributions are made from a paycheck after income taxes have been deducted, so there is no upfront tax deduction. The primary purpose is to allow savers to set aside significant amounts for retirement by taking advantage of a much higher overall contribution ceiling. These contributions grow within the 401(k) on a tax-deferred basis. While the contributions themselves can be withdrawn tax-free in the future, the earnings are taxable upon distribution.

This strategy is particularly useful for high-income earners who have already reached their standard 401(k) contribution limits.

Understanding Contribution Types and Limits

To use after-tax 401(k) contributions, it is helpful to understand the different ways money can be put into a 401(k). The most common is the traditional, or pre-tax, contribution, where money is deducted from your paycheck before income taxes are calculated, reducing your taxable income. Another type is the Roth 401(k) contribution, made with money that has already been taxed; these contributions do not lower your current taxable income, but qualified withdrawals in retirement are tax-free.

The third type, after-tax contributions, are also made with post-tax dollars but are governed by a different set of rules and limits. The Internal Revenue Service (IRS) sets two distinct annual contribution limits for this strategy. The first is the employee elective deferral limit, which for 2025 is $23,500. This limit applies to the combined total of an employee’s traditional and Roth 401(k) contributions.

A separate, much higher limit, known as the overall plan limit, also exists. Governed by Internal Revenue Code Section 415, this limit for 2025 is $70,000. This overall cap includes all contributions made to a participant’s account for the year: the employee’s own contributions, any employer matching funds, employer profit-sharing, and after-tax contributions.

The difference between the overall limit and the sum of your and your employer’s contributions creates the available space for after-tax contributions. For example, imagine an employee under age 50 contributes the maximum $23,500 to their traditional 401(k) in 2025. Their employer contributes a $10,000 match, making the total $33,500. Subtracting this from the $70,000 overall limit leaves a remainder of $36,500, which is the maximum amount the employee could contribute on an after-tax basis that year, provided their plan allows it.

Determining Your Eligibility and Plan Allowance

Before you can make after-tax contributions, you must verify that your employer’s 401(k) plan permits this action. This strategy is pursued by individuals who have already contributed the maximum amount allowed under the annual employee deferral limit. The ability to make after-tax contributions is an optional provision that an employer must choose to include.

To determine if your plan allows it, you need to review your plan’s official documents, primarily the Summary Plan Description (SPD). When reviewing the SPD, search for keywords such as “after-tax contributions” or “voluntary contributions.”

For the strategy to be most effective, the plan must also allow for either “in-plan Roth conversions” or “in-service distributions.” An in-plan conversion lets you move the after-tax funds directly into the Roth 401(k) portion of your plan. An in-service distribution allows you to withdraw the after-tax funds while still employed and roll them over to an external Roth IRA.

The Mega Backdoor Roth Conversion Process

The goal for many individuals making after-tax 401(k) contributions is to move that money into a Roth account, a strategy known as the “Mega Backdoor Roth.” This process converts post-tax contributions into Roth assets, allowing all future investment growth to be tax-free upon qualified withdrawal. There are two primary pathways to execute the conversion.

The first method is an in-plan Roth conversion. You instruct your 401(k) plan administrator to move the funds from your after-tax sub-account directly into your Roth 401(k) sub-account. Some plans may offer an automatic conversion feature, which simplifies the process by immediately converting any after-tax contributions to Roth status, minimizing the potential for taxable earnings to accrue.

The second path involves an in-service distribution to a Roth IRA. If your plan permits this, you can request a withdrawal of your after-tax contributions and directly roll them over to a new or existing Roth IRA. This route can offer a broader range of investment choices than what is available within the 401(k) plan.

The principal amount of your after-tax contributions moves to the Roth account tax-free since you have already paid income tax on that money. However, any investment earnings that have accumulated on those contributions before the conversion is completed are taxable. For instance, if you contribute $20,000 in after-tax funds and it grows to $20,500 by the time you convert it, the $500 of earnings will be taxed as ordinary income. It is advantageous to convert the funds as quickly as possible after they are contributed.

Tax Reporting for Contributions and Conversions

After completing a Mega Backdoor Roth conversion, proper tax reporting is necessary. The process is documented through Form 1099-R, which your 401(k) plan administrator will issue in the year following the transaction. This form details the distribution from your after-tax account for your income tax return.

When you receive Form 1099-R, it will show the total amount converted in Box 1. Box 2a will report the taxable amount, which should only consist of the earnings that accrued on your after-tax contributions. Box 5 will show your after-tax basis—the principal amount you contributed—which is not taxed again.

The taxable portion from Box 2a of the Form 1099-R must be reported as ordinary income on your Form 1040. The Mega Backdoor Roth process does not require you to file Form 8606, as that form is for tracking basis in traditional IRAs. For these conversions, Form 1099-R and your own records are the documents for substantiating the tax-free nature of the principal.