Roth 401(k) vs. After-Tax 401(k): Key Differences Explained

Choosing between a Roth 401(k) and an after-tax 401(k) has significant tax and retirement income implications. While both allow contributions beyond a traditional pre-tax 401(k), they differ in how earnings are taxed and withdrawn. Understanding these differences is crucial for aligning your choice with your financial goals.

Contribution Guidelines

Roth 401(k) and after-tax 401(k) contributions follow different rules that impact savings and tax treatment.

For 2024, the total 401(k) contribution limit—including pre-tax, Roth, and after-tax—is $69,000 ($76,500 for those 50 and older with catch-up contributions). Roth 401(k) contributions fall under the elective deferral limit of $23,000 ($30,500 with catch-up), meaning they count toward the same cap as pre-tax contributions. After-tax 401(k) contributions, however, are only constrained by the overall plan maximum, allowing high earners to contribute beyond the elective deferral limit once pre-tax and Roth contributions are maximized.

Roth 401(k) contributions are made with after-tax dollars and included in taxable income for the year they are made. After-tax 401(k) contributions are also post-tax but do not receive the same tax treatment upon withdrawal, a key distinction for long-term tax planning.

Tax Treatment

The taxation of earnings in a Roth 401(k) versus an after-tax 401(k) has major implications for retirement income. Roth 401(k) contributions and investment gains grow tax-free if the account has been open for at least five years and withdrawals begin at age 59½ or later. This makes Roth 401(k)s attractive for those expecting to be in a higher tax bracket in retirement.

An after-tax 401(k) does not offer tax-free growth on earnings. While contributions can be withdrawn tax-free at any time, investment gains are taxed as ordinary income upon withdrawal. Many individuals convert after-tax 401(k) funds into a Roth IRA through an in-plan conversion or rollover to avoid future taxation on investment gains.

A popular strategy, the “mega backdoor Roth,” involves rolling after-tax contributions into a Roth IRA, where earnings grow tax-free. However, earnings converted before the rollover are taxed in the year of conversion. Some plans allow automatic in-plan Roth conversions, simplifying the process and reducing tax exposure on earnings.

Withdrawal Rules

Accessing funds from a Roth 401(k) or an after-tax 401(k) comes with specific conditions. Roth 401(k) contributions can be withdrawn anytime without penalty, but earnings are subject to a five-year holding period. If withdrawn before five years and before age 59½, earnings are taxed as ordinary income and may incur a 10% early withdrawal penalty unless an exception applies.

For an after-tax 401(k), contributions can be withdrawn tax-free anytime, but earnings are taxed as ordinary income. Unlike Roth 401(k) earnings, there is no way to take a qualified tax-free withdrawal from an after-tax 401(k) unless the funds are rolled into a Roth IRA before significant investment gains accumulate.

Some 401(k) plans allow in-service withdrawals, enabling access to after-tax contributions while still employed. However, not all plans offer this option, and those that don’t require individuals to wait until separation from employment to execute a rollover. Hardship withdrawals are subject to strict IRS guidelines and require documentation.

Employer Match Considerations

Employer contributions to a 401(k) are always made on a pre-tax basis, regardless of whether an employee contributes to a Roth 401(k) or an after-tax 401(k). This means that even if an employee directs their own contributions into a Roth or after-tax account, the employer’s portion is deposited into a traditional 401(k) sub-account, where it grows tax-deferred but is subject to ordinary income tax upon withdrawal.

Vesting schedules determine how much of the employer match an employee retains. Many plans impose graded or cliff vesting requirements, meaning employees must work for a set number of years before gaining full ownership of matched funds. For example, a plan may require three years of service for 100% vesting or implement a phased schedule where 20% vests each year over five years. Employees who leave before becoming fully vested forfeit some or all of the employer contributions.

Required Minimum Distributions

A key difference between a Roth 401(k) and an after-tax 401(k) is how required minimum distributions (RMDs) apply.

A Roth 401(k) is subject to RMDs starting at age 73 (or 75 for those born in 1960 or later) if the funds remain in the employer-sponsored plan. However, rolling a Roth 401(k) into a Roth IRA eliminates RMD obligations, allowing funds to continue growing tax-free indefinitely.

An after-tax 401(k) follows different rules because its earnings are taxed like a traditional 401(k). RMDs apply to the entire balance, including both contributions and investment gains, once the account holder reaches the required age. Since earnings are taxed as ordinary income upon withdrawal, RMDs can create an unexpected tax burden. Many individuals mitigate this by rolling after-tax contributions into a Roth IRA before RMDs begin, ensuring future withdrawals remain tax-free while reducing taxable retirement savings.

Rollover Possibilities

Moving funds between retirement accounts can provide tax advantages, and both Roth 401(k) and after-tax 401(k) contributions offer unique rollover opportunities.

A Roth 401(k) can be rolled directly into a Roth IRA without triggering taxes, preserving the tax-free status of contributions and earnings. This avoids RMDs, as Roth IRAs do not have mandatory withdrawals. However, the five-year rule for Roth IRAs applies, meaning the account must be open for at least five years before tax-free withdrawals of earnings can be made. If a Roth 401(k) is rolled into another employer’s Roth 401(k) instead of a Roth IRA, RMDs will still apply.

An after-tax 401(k) offers a unique rollover opportunity through the “mega backdoor Roth” strategy. Individuals can roll after-tax contributions into a Roth IRA while transferring any associated earnings into a traditional IRA. This allows contributions to grow tax-free in the Roth IRA while deferring taxes on earnings in the traditional IRA until withdrawals begin. Some employer plans allow in-plan Roth conversions, which move after-tax contributions into a Roth 401(k) without requiring a rollover to an IRA. While this simplifies the process, it does not eliminate RMDs, making an external Roth IRA rollover a more tax-efficient option for those looking to avoid mandatory withdrawals in retirement.