After-Tax Contributions to 401k: How They Work

After-tax contributions to a 401(k) plan are a distinct method for retirement savings, separate from pre-tax or Roth 401(k) contributions. These funds are deposited from your paycheck after income taxes have been withheld, so the contribution does not lower your current taxable income. This option is not available in all employer-sponsored plans. Its function is to provide a way for individuals to save for retirement beyond the standard employee contribution limits set by the IRS.

Understanding Contribution Types and Limits

To understand after-tax contributions, it is helpful to differentiate the three main types of 401(k) deposits. Traditional, or pre-tax, contributions reduce your current taxable income, but withdrawals in retirement are taxed. Roth 401(k) contributions are made with money that has already been taxed, and qualified withdrawals during retirement are tax-free. Non-Roth after-tax contributions are also made with post-tax dollars, but their earnings grow tax-deferred and are taxed upon withdrawal.

After-tax contributions are linked to two separate annual IRS limits. The first, governed by Internal Revenue Code Section 402(g), restricts the total an employee can contribute to their Traditional and Roth 401(k) accounts combined. For 2025, this employee contribution limit is $23,500. Workers aged 50 and over can make additional “catch-up” contributions of $7,500, while those aged 60 to 63 may contribute a higher catch-up of $11,250, depending on plan rules.

A second, higher limit exists under Internal Revenue Code Section 415(c), known as the overall limit, which is $70,000 for 2025. This cap includes all contributions to an account: employee pre-tax and Roth contributions, employer matching funds, profit sharing, and non-Roth after-tax contributions. After-tax contributions allow a saver who has reached the employee limit to continue saving up to this overall ceiling.

For example, an employee under 50 contributes the maximum $23,500 to their Roth 401(k) in 2025. Their employer adds a $10,000 match, bringing the total to $33,500. This individual could contribute an additional $36,500 in after-tax funds ($70,000 – $33,500) if their plan allows, providing an opportunity for accelerated retirement savings.

Eligibility and Making Contributions

The ability to make after-tax contributions depends on your employer’s 401(k) plan rules, as not all plans offer this feature. To determine eligibility, review the plan’s Summary Plan Description (SPD). You can obtain the SPD from your company’s human resources department or through the plan administrator’s online portal.

If the SPD is unclear, contact the plan administrator or your HR benefits specialist. They can confirm if after-tax contributions are permitted and explain any specific plan rules or limitations.

Once you confirm your plan allows after-tax contributions, the setup is straightforward. You can make this election through the same online portal used for regular 401(k) contributions. You will specify the amount, either as a percentage of your pay or a flat dollar amount, to be deducted from your paycheck after taxes.

The Mega Backdoor Roth Conversion Strategy

The “mega backdoor Roth” conversion is a strategy for those with access to a plan that permits after-tax contributions. This technique allows you to move after-tax dollars into a Roth account, where future investment growth can become tax-free. The execution hinges on your plan’s rules regarding distributions while you are still an employee.

First, confirm that your 401(k) plan allows for “in-service distributions” or “in-plan Roth conversions” of after-tax funds. An in-service distribution lets you roll money into an IRA while still employed. An in-plan conversion allows you to move funds to the Roth 401(k) sub-account within the same plan. If your plan does not permit either, you must wait until leaving your job to perform the conversion, which can create tax consequences on earnings.

With favorable plan rules, you can initiate the rollover or conversion by contacting your 401(k) plan administrator. Many plans have streamlined this process and may offer an automated feature that converts after-tax contributions to Roth regularly, such as with each paycheck. This automation minimizes the potential for taxable investment earnings to accrue before the conversion.

The after-tax contributions themselves can be moved into a Roth IRA tax-free. Any investment earnings on those contributions, however, are considered pre-tax money. When converting, you can roll these earnings into a Traditional IRA to grow tax-deferred. Alternatively, you can roll the earnings into the Roth IRA, but you must pay ordinary income tax on them in the year of the conversion. For instance, if you convert $20,000 in contributions that generated $500 in earnings, the $20,000 is tax-free, but the $500 would be taxable if moved to the Roth IRA.

Tax Treatment of Withdrawals Without Conversion

If you do not convert your after-tax contributions to a Roth account, withdrawals in retirement follow a pro-rata rule. This means you cannot withdraw only your tax-free contributions first. Each withdrawal is treated as a proportional mix of your contributions and their taxable earnings.

This rule dictates that every dollar you withdraw is a proportional mix of your after-tax contributions (your basis) and the taxable investment earnings. The pro-rata calculation is based solely on the values within the after-tax sub-account. The pre-tax and Roth portions of your 401(k) are not included in this calculation.

To illustrate, imagine the after-tax portion of your 401(k) holds $80,000 of your contributions and has generated $20,000 in earnings, for a total of $100,000. In this scenario, 80% of the account is tax-free basis and 20% is taxable earnings. If you take a $10,000 distribution, $8,000 would be a tax-free return of contributions and the remaining $2,000 would be taxable income.