How to Make After-Tax Contributions to Your 401k

The 401(k) plan is a familiar retirement savings vehicle, with most workers contributing directly from their paychecks. Beyond these standard pre-tax or Roth 401(k) contributions, a less common option exists for savers looking to maximize their accounts: after-tax contributions. This strategy operates differently from conventional contributions and can increase the total amount saved annually, allowing for accelerated, tax-advantaged growth.

Understanding After-Tax 401(k) Contributions

There are three primary ways to fund a 401(k) account. The first is the traditional, pre-tax contribution, where funds are deferred from a paycheck before taxes, reducing current taxable income. This money grows tax-deferred, and distributions in retirement are taxed as ordinary income.

Another option is the Roth 401(k) contribution. These are made with post-tax dollars and do not lower current taxable income. The benefit is that both contributions and investment earnings can be withdrawn tax-free in retirement, assuming certain conditions are met.

Distinct from both is the non-Roth, after-tax contribution. Like a Roth contribution, these are made with money that has already been taxed. The difference is in the tax treatment of the earnings. While the after-tax contributions can be withdrawn tax-free, the investment gains grow tax-deferred and are taxed as ordinary income upon withdrawal.

This hybrid nature is for savers who have reached their standard contribution limits but want to save more in their 401(k). It creates a separate bucket of money within the plan that requires careful tracking by the plan administrator.

Contribution Limits and Plan Eligibility

The ability to make after-tax contributions depends entirely on the rules of an individual’s 401(k) plan, as not all employers offer this feature. To confirm eligibility, review your plan’s documents, like the Summary Plan Description, or contact the plan administrator directly.

If the plan allows it, contributions are governed by an overall limit set by the Internal Revenue Code. For 2025, this limit is $70,000, plus applicable catch-up contributions. This figure includes all employee contributions (pre-tax and Roth), all employer contributions (matching or profit sharing), and any after-tax contributions.

To calculate available space for after-tax contributions, subtract your employee contributions and all employer contributions from the overall limit. For example, an employee under 50 who contributes $23,500 and receives a $10,000 employer match has used $33,500 of the limit. Subtracting this from the $70,000 overall limit leaves $36,500 of room for after-tax contributions.

Catch-up contributions increase the total limits for those age 50 and over. For 2025, the standard catch-up is $7,500, raising the total limit to $77,500 for those aged 50-59 and 64 or older. A provision for 2025 allows individuals aged 60-63 to make a higher catch-up contribution of $11,250, bringing their total limit to $81,250.

Executing the Mega Backdoor Roth Strategy

After-tax contributions are the first step in a strategy known as the “mega backdoor Roth.” This process involves moving after-tax funds into a Roth account, making all future investment growth tax-free instead of tax-deferred. This is particularly useful for high earners who may be prevented by income limits from contributing directly to a Roth IRA.

One method is an in-plan conversion. If the 401(k) plan allows, an individual can convert the after-tax funds into the Roth 401(k) portion of the same plan. This is a seamless option that involves contacting the plan administrator or using the plan’s online portal.

A second method is a rollover to an external Roth IRA. This requires taking an “in-service distribution” of the after-tax contributions while still employed and rolling the funds into a Roth IRA. This approach can provide greater investment flexibility than a typical 401(k).

It is best to execute this conversion or rollover as quickly as possible after the contributions are made. Any earnings that accumulate on the after-tax money before the conversion will be taxable when moved to the Roth account. Acting swiftly minimizes or eliminates the taxable portion of the conversion.

Taxation of Withdrawals and Rollovers

If after-tax 401(k) funds are not immediately converted to a Roth account, their tax treatment becomes more complex. When taking a distribution, it is necessary to separate the original contributions from the earnings. The contributions, or “basis,” can be withdrawn free of federal income tax.

The investment earnings, however, have grown tax-deferred and are fully taxable as ordinary income upon withdrawal. This creates a mixed tax situation where part of the account is tax-free and part is taxable.

When rolling over funds from an account with both after-tax contributions and tax-deferred earnings, the IRS applies the pro-rata rule. This rule dictates that any distribution consists of a proportional mix of tax-free contributions and taxable earnings. An individual cannot roll over only the tax-free portion.

For example, if an account holds $80,000 in contributions and $20,000 in earnings, any withdrawal reflects this 80/20 split. A $50,000 rollover would consist of $40,000 in tax-free contributions and $10,000 in taxable earnings. The financial institution reports these amounts on Form 1099-R.