How 401k After-Tax Contributions Work

After-tax 401(k) contributions allow individuals to invest beyond standard retirement plan limits using income that has already been taxed. This feature, while not offered by all employers, provides a way for savers to increase their retirement assets after reaching their annual employee contribution cap. The funds are deposited into a non-Roth, after-tax sub-account within the 401(k). While the contributions can be withdrawn tax-free, their investment earnings grow on a tax-deferred basis, which enables strategies that can convert these savings into tax-free income during retirement.

Understanding Contribution Types and Limits

To use after-tax contributions, it’s helpful to understand the three types of employee 401(k) contributions. Pre-tax contributions are made before income taxes are calculated, which reduces your current taxable income, but withdrawals in retirement are taxed. Roth 401(k) contributions are made with money that has already been taxed, so qualified withdrawals of both contributions and earnings are tax-free in retirement. After-tax contributions are also made with post-tax money, but only the original contributions can be withdrawn tax-free; the earnings are tax-deferred and taxed upon withdrawal unless converted. This contribution is separate from and in addition to any pre-tax or Roth 401(k) contributions.

The Internal Revenue Service sets two annual limits. The first is the employee deferral limit, restricting total contributions to pre-tax and Roth 401(k) accounts. For 2025, this limit is $23,500. Individuals age 50 and over can make additional catch-up contributions of $7,500, and a higher catch-up of $11,250 is available for those aged 60 to 63.

A second, higher limit applies to total annual additions from all sources, including employee deferrals, employer contributions, and after-tax contributions. For 2025, this overall limit is $70,000. This ceiling is increased by any catch-up contributions made. For example, someone aged 50-59 has a total limit of $77,500 ($70,000 + $7,500). The space between your combined employee and employer contributions and this total ceiling is the maximum amount you can contribute on an after-tax basis.

Determining Plan Eligibility and Contribution Room

You must first confirm that your employer’s 401(k) plan permits after-tax contributions, as this feature is not standard. The most direct way to find this information is by reviewing your plan’s Summary Plan Description (SPD), a legally required document that outlines the rules of your retirement plan. Look for terms such as “after-tax contributions” or “voluntary contributions.” If the SPD is unclear, contact your plan administrator or human resources department.

Once you confirm eligibility, you need to calculate your personal contribution capacity. To determine your available room, take the overall limit for the year ($70,000 for 2025, plus any applicable catch-up) and subtract your planned employee deferrals and any expected employer contributions, like matching funds. The remaining amount is your maximum potential after-tax contribution.

The Mega Backdoor Roth Conversion Strategy

After-tax 401(k) contributions are central to a strategy known as the “Mega Backdoor Roth.” This process moves after-tax funds into a Roth account, where all future growth and qualified withdrawals become tax-free. This is advantageous for high-income earners who exceed the income limitations for direct Roth IRA contributions, effectively bypassing those caps.

There are two methods for executing a Mega Backdoor Roth conversion. The first is an in-plan conversion, where after-tax funds are moved into the Roth 401(k) portion of the same plan, which is convenient as it keeps all funds with the employer. Some plans offer an automated option that converts funds with each payroll deposit.

The second method is an in-service withdrawal and rollover to an external Roth IRA, which requires the plan to permit distributions while you are still employed. With this rollover, the after-tax contributions can move to a Roth IRA tax-free. Any earnings on those contributions are pre-tax money and can be rolled into a Traditional IRA to maintain their tax-deferred status.

The timing of the conversion is an important part of the strategy. It is best to convert after-tax contributions into a Roth account as quickly as possible. Any delay allows investment earnings to accumulate, and these earnings are taxable as ordinary income upon conversion. A swift conversion minimizes or eliminates this tax liability.

Executing the Contribution and Conversion Process

To begin, set up after-tax contributions through your 401(k) provider’s online portal, where you can adjust your contribution elections. You will need to specify the percentage of your paycheck or a flat dollar amount to be designated as an after-tax contribution. In some cases, you may need to submit a form to your company’s payroll or HR department. Monitor your total contributions throughout the year to stay within the overall IRS limit.

After the funds are in your account, initiate the conversion. For an in-plan conversion, look for an option like “in-plan Roth conversion” on your 401(k) provider’s website or call the provider to request it. For an in-service distribution to a Roth IRA, you will request a distribution and specify that the after-tax portion should be rolled over to a Roth IRA.

Tax Implications of Withdrawals

The tax consequences for your after-tax 401(k) funds depend on whether they are converted to a Roth account. If left in the non-Roth after-tax account, the original contributions can be withdrawn tax-free in retirement. However, all accumulated investment earnings are tax-deferred and will be taxed as ordinary income when distributed.

When taking partial distributions from an account with both after-tax contributions and pre-tax earnings, the withdrawal is subject to a pro-rata rule. This means each distribution will consist of a proportional mix of tax-free contributions and taxable earnings, resulting in an ongoing tax liability.

This outcome contrasts with the tax treatment if the funds were moved into a Roth 401(k) or Roth IRA. Once in a Roth account, withdrawals of both contributions and earnings are completely tax-free, provided the distribution is “qualified.” A qualified distribution requires the account holder to be at least 59 ½ years old and to have satisfied the five-year rule.

Two separate five-year rules can apply to Roth IRAs.

• To withdraw earnings tax-free, five tax years must have passed since you first contributed to any Roth IRA.
• Each conversion has its own five-year holding period. Withdrawing converted funds within five years may trigger a 10% penalty, though this is waived if you are over age 59 ½.