What Is An After-Tax 401k? (Not Roth)

An after-tax 401k is a special type of 401k contribution that allows you to add additional "after-tax" money into your 401k account.

Most long-term investors realize there aren’t too many “quick and easy” tricks to getting better investing results, but a few tried and true methods can boost performance. 

The most important one is to pursue a diverse portfolio. You also want to minimize taxes on the income your investments earn. Many investors use retirement accounts, including their 401(k)'s, as a tax shelter.

But are you taking full advantage of your retirement accounts? If you’re not making after-tax 401(k) contributions, you could be missing tax-savings opportunities. That's because after-tax 401(k) contributions can dramatically increase the amount of money that you can put into a tax-sheltered retirement account.

Here’s what you need to know about making after-tax contributions to your 401(k).

What Is An After-Tax 401(k) Contribution?

An after-tax 401(k) contribution is money that you put into a 401(k) that does not have an immediate tax benefit. You must pay income tax on your money before you contribute it to your 401(k). After you pay the tax, you can put this money into your 401(k). Earnings on after-tax contributions to a 401(k) grow tax-deferred. That means the earnings on these contributions aren’t taxed until its withdrawn from the plan. When you withdraw the money, you’ll pay tax on the earnings but not on the original contributions.

After-tax 401(k) contributions allow an employee to “fill up” their 401(k) bucket to the annual limit, even if your employee and employer contributions don’t add up to the annual limit.

For example, let's say a 36-year-old person contributes $23,000, the employee maximum, to her 401(k) account in 2024. If her employer contributes $10,000 to the account, her total contributions for the year are $33,000. That’s a lot of money to contribute to a retirement account, but it is well short of the $69,000 total limit for 401(k) contributions. If she has sufficient income, she can add up to $36,000 of after-tax contributions to her 401(k) for the year.

While many 401(k) plans allow you to make after-tax contributions, not all of them do. You will need to visit your 401(k) plan’s website (or review the documents from HR) to figure out if you can “super-fund” your 401(k) with after-tax contributions.

How To Make After-Tax Contributions

If you’re a W-2 employee without side-hustle income, you can only make an after-tax contribution if your employer’s 401(k) plan allows it. Unfortunately, not all employers do. You’ll need to consult your 401(k) plan documents to see if after-tax contributions are allowed. In most cases, if after-tax contributions are allowed, you can make them by adjusting your contributions on your plan’s website.

Self-employed people can only “super-fund” their 401(k) when their individual 401(k) plan allows them to do so. You’ll need to carefully read your 401(k) documents (or talk to customer support) to figure out whether after-tax contributions are available, but most of the big-name brokerages don’t allow after-tax contributions in their free solo 401(k) plans. My Solo 401(k) is one company that does allow voluntary after-tax contributions.

What To Do With After-Tax Contributions

Once you have after-tax money in your 401(k) account, there are a few strategies you can employ to super-charge the tax advantages associated with after-tax contributions.

The first strategy is called the “Mega Backdoor Roth”. The mega backdoor Roth involves converting all of your after-tax contributions to Roth contributions. When you do this, all the contributions AND all the earnings on your contributions receive the “Roth” treatment. That means that you never have to pay income tax on the contributions or the earnings ever again.

The easiest way to fund a Mega Backdoor Roth is to use automatic in-plan Roth conversions. This feature, offered by some employers, allows your plan provider to automatically convert your after-tax contributions to Roth contributions on a regular schedule. Some providers may even convert the contributions every other week when you automatically fund your 401(k). Combining financial automation and permanent tax advantages is the best option when it comes to after-tax contributions.

If your employer’s plan doesn’t allow automatic Roth conversions, you may be able to convert those contributions on your own. Consider making the conversions every quarter, so that your withdrawals are simple.

If your employer doesn’t offer in-plan conversions, you can rollover money from your 401(k) to traditional and Roth IRAs. This is called a Mega Backdoor Roth IRA conversion, and it is clunkier than an in-plan conversion. However, it is likely worth the hassle if you have a lot of income that you want to invest in a tax-advantaged retirement account.

Differences Between Roth and After-Tax 401(k) Contributions

It’s easy to confuse after-tax 401(k) contributions and Roth contributions. After all, Roth contributions are sometimes called after-tax. Additionally, investors pay taxes on their income before they make Roth or after-tax contributions with it. So what is the difference? Unless you do a Roth conversion, the earnings on after-tax contributions are tax-deferred instead of “already taxed.” That means that after-tax contributions grow tax-free, but they will be taxed as regular income when you withdraw the money. By contrast, Roth contributions are already taxed. The IRS will never tax the contributions or the earnings again.

Most investors want their after-tax contributions to become Roth contributions as quickly as possible. That is why many investors want to find ways to do in-plan Roth conversions.

Alternatives to After-Tax Contributions

High-income earners (and super-savers with modest incomes) may not have the ability to make after-tax contributions in their 401(k) plans. Or they may not want the hassle of converting after-tax contributions to Roth contributions. In that case, there are a few excellent alternatives to making after-tax contributions.  

• Invest through a brokerage: Building up investments in an online brokerage account isn’t perfect. You will pay capital gains taxes when you trade in the account. However, the money in a brokerage account is accessible, so you can use it to put an addition on your house, to buy a business, or to help pay for your child’s college education.
• Purchase alternative investments: Instead of investing in the stock market, you could choose to invest in crowdfunded real estate, venture capital, or other alternative investments to diversify your investment portfolio.
• Save cash: Holding a cash cushion for an emergency fund or to fund a short-term goal can be a good option. Cash won’t beat inflation in the long run, so you don’t want to hold too much cash. That said, a healthy emergency fund can be very comforting during a turbulent economy. 

When To Make After-Tax 401(k) Contributions

Making after-tax contributions into a 401(k) isn’t the right decision for everyone. However, if you’re a high-income earner, after-tax contributions could help you save money on taxes. Before you dig into the details, consider the appropriate order of operations for retirement investing. You’ll want to max out all of your other accounts before you super-fund your 401(k). But if you’re maxing out all of your retirement accounts, you may decide that after-tax contributions are the best way to build wealth for you.