Most firms and firms incentivize staff to avoid wasting for retirement. Most of the time, they’ll do that by means of a 401(okay) plan. Once you first onboarded together with your firm, you had been seemingly given the selection to take part in a 401(okay). Whilst you may enhance your contributions annually, it’s potential the account in any other case falls on the again burner.
However for some excessive earners, there is perhaps room in your 401(okay) to multiply your retirement financial savings annually—you simply must know the place to look. Many plan sponsors give staff the choice to make after-tax contributions, which can be transformed to Roth, resulting in tax-free withdrawals in retirement (we’ll get into the specifics later).
Let’s take a more in-depth take a look at how 401(okay)s work, what after-tax contributions are, and the best way to leverage them to extend your retirement financial savings.
Half 1: The Fundamentals of Your 401(okay)
A 401(okay) is an employer-sponsored retirement account that gives staff a tax-advantaged strategy to save for retirement. Known as a “outlined contribution plan,” a 401(okay) permits staff and employers to contribute to the account.
Workers typically select a set proportion of their pay to defer into the plan. The funds are robotically deferred to the 401(okay) plan in your behalf. Relying on the plan design, you could have a selection in how your contributions are invested.
401(okay) and Taxes
Typically occasions, your contributions to your 401(okay) are taken out of your paycheck earlier than taxes. As such, they’re aptly named “pre-tax contributions.” The quantity you contribute to your 401(okay) in pre-tax contributions will cut back your taxable earnings for the yr.
Conversely, you could have the choice to contribute to a Roth 401(okay) as an alternative. If that’s the case, your contributions is not going to decrease your taxable earnings for the yr. The trade-off? The funds in a Roth 401(okay) develop tax-deferred, and certified distributions are tax-free as properly (together with each the principal quantity plus earnings).
For a Roth withdrawal to qualify for the tax-free remedy, you will need to have opened and made your first contribution to the account at the least 5 years in the past and meet one of many following standards:1
- You’re 59.5 or older
- You’re thought-about disabled, as outlined by the IRS
- You’re a beneficiary of an inherited account
The IRS limits the quantity of pre-tax or Roth contributions you’re in a position to make yearly to your 401(okay) and different tax-advantaged retirement accounts.
For 2025, the deferral restrict is $23,500 per taxpayer. In the event you’re over 50, you may be allowed to make catch-up contributions. These begin at $7,500 and enhance to $11,250 for workers between the ages of 60 and 63 (this “tremendous” catch-up contribution is new as of 2025).
Right here’s what the pre-tax contribution limits appear like, primarily based in your age:2
- As much as age 49: $23,500
- Ages 50-59: $31,000
- Ages 60-63: $34,750
- Age 64 and above: $31,000
The funds in both your conventional 401(okay) or Roth 401(okay) will develop tax-deferred, which means you gained’t need to pay tax (capital features or bizarre earnings tax) on the earnings annually. This permits your cash to remain invested and develop uninterrupted between when the contributions are made and if you withdraw (presumably in retirement).
When you attain age 59.5, it’s possible you’ll be allowed to make penalty-free withdrawals out of your 401(okay). Take into accout, in case you attempt to withdraw earlier than then, you’ll be hit with an early withdrawal penalty—until you’re taking out a mortgage out of your 401(okay) or meet one of many IRS’s exceptions.
Withdrawals out of your conventional 401(okay) are topic to bizarre earnings tax—keep in mind, up till now, neither the unique contributions nor the earnings have been taxed. When you attain age 73 (or age 75, beginning in 2033), you may be required to withdraw a minimal quantity out of your pre-tax 401(okay) annually. These are known as “required minimal distributions” or RMDs, they usually’re calculated primarily based in your account stability by the top of the earlier calendar yr and the IRS uniform lifetime desk. ROTH 401ks usually are not topic to RMD guidelines.
Take Benefit of Employer Matching
Many employers incentivize staff to contribute to their 401(okay) by providing what’s known as “employer matching.” For each greenback or wage proportion an worker contributes, the employer will match it (often as much as a specific amount).
For instance, let’s assume your employer matches your contributions by 50% as much as 3% of your wage. In the event you earn $200,000, 3% of your wage is $6,000. In the event you contribute 3% of your wage, they’ll chip in an extra $3,000 matching, primarily based on the figures above.
Employer matching is actually free cash. Most staff will profit from contributing to their 401(okay)s at the least sufficient to max out the matching contributions (however ideally, maxing out the IRS annual contribution limits as properly).
One observe on employer matching: Typically, employers will implement a vesting schedule for employer matching. Do you have to go away the corporate earlier than the vesting interval has ended, it’s possible you’ll lose all or a few of your employer matching contributions. You’ll, nevertheless, be entitled to something you contributed to the account, regardless of how lengthy you stick with the corporate.
Half 2: After-Tax Contributions
To this point, we’ve centered on pre-tax and ROTH contributions and the way they decrease your tax invoice now, whereas serving to you develop funds for retirement. The catch is, pre-tax and ROTH contributions are restricted yearly by the IRS (in case you’re below 50, the cap is $23,500 for 2025).
For prime earners, particularly, the pre-tax contribution might really feel low, and you want you could possibly save extra. In the event you’re fascinated about rising contributions past the pre-tax restrict, your plan might mean you can make after-tax contributions as properly.
Simply as they sound, after-tax contributions to your 401(okay) are robotically deferred out of your paycheck to your 401(okay). Whereas these extra contributions will show you how to develop your retirement financial savings additional, they don’t decrease your taxable earnings for the yr (as your pre-tax contributions would).
To find out the utmost after-tax deferral to a 401(okay) plan, you’ll must first know the overall quantity you and your employer are allowed to contribute collectively to a defined-contribution retirement plan. In 2025, this quantity is $70,000, although this restrict is adjusted yearly.3
If we assume you max out your pre-tax contributions at $23,500 and your employer provided no matching, the utmost quantity you could possibly contribute in after-tax contributions is an extra $46,500.
Now, let’s say your employer offers a $10,000 matching contribution. Your pre-tax contribution of $23,500 plus the extra $10,000 employer matching brings your whole as much as $33,500. As a substitute of $46,500, now you can contribute as much as $36,500 in after-tax contributions.
Let’s take a more in-depth search for 2025:
| No Employer Matching | With Employer Matching | |
| Your pre-tax contributions | $23,500 | $23,500 |
| Employer matching | $0 | $10,000 |
| After-tax contributions | $46,500 | $36,500 |
| Whole contributions | $70,000 | $70,000 |
The whole contribution restrict stays the identical, even in case you’re eligible for catch-up contributions. Utilizing the identical instance as above, let’s take a look at it once more, assuming you’re 62 and maxing out pre-tax contributions at $34,750:
| No Employer Matching | With Employer Matching | |
| Your pre-tax contributions (together with catch-up) | $34,750 | $34,750 |
| Employer matching | $0 | $10,000 |
| After-tax contributions | $46,500 | $36,500 |
| Whole contributions | $81,250 | $81,250 |
Half 3: Changing After-Tax to Roth
Whereas after-tax contributions to a conventional 401(okay) have comparable traits to Roth contributions, they aren’t precisely the identical. The earnings on after-tax contributions in a conventional 401(okay) will nonetheless be topic to bizarre earnings tax.
Right here’s a more in-depth take a look at the distinction between after-tax and Roth 401(okay) contributions:
| Tax Therapy | Conventional 401(okay) After-Tax Contributions | Roth 401(okay) Contributions |
| Preliminary contributions | No tax deduction | No tax deduction |
| Funding earnings | Tax deferred | Tax deferred |
| Withdrawals (Principal solely) | No tax owed | No tax owed |
| Withdrawals (Earnings solely) | Unusual earnings tax owed | No tax owed (assuming certified withdrawals) |
Roth accounts have the tax benefit over after-tax contributions, since they mean you can get pleasure from probably tax-free withdrawals in retirement. For that cause, in case you’re in a position to make after-tax contributions to your 401(okay), you may wish to take it a step additional and full a Roth conversion—primarily transition these funds from the normal 401(okay) right into a Roth account.
There are a number of potential methods to do that, relying on what your employer’s plan provides.
Possibility #1: In-plan Roth conversion
The best choice is to instantly roll the after-tax {dollars} right into a Roth 401(okay). That is solely potential, nevertheless, in case your plan permits for “in-plan conversions.” Assuming they do, you must have the ability to pretty simply convert the after-tax {dollars} to the Roth account. Simply remember, in case your after-tax contributions earn any progress earlier than changing to the Roth account, you’ll owe bizarre earnings tax within the yr the conversion takes place. The excellent news is, some firms enable automated in-plan conversions. The after-tax {dollars} could be robotically rolled right into a Roth account, which might get rid of the opportunity of extra earnings previous to conversion.
For instance, say you contribute $30,000 in after-tax contributions to your conventional 401(okay). On the finish of the yr, you determine to do an in-plan conversion and transition that $30,000 to your plan’s Roth 401(okay). Earlier than the conversion occurs, nevertheless, the funds accumulate an extra $2,000 in earnings. You can be required to pay bizarre earnings tax on these earnings. However as soon as the conversion is full, every little thing within the account will develop tax-deferred, and certified withdrawals shall be tax-free.
You might be able to roll the funds right into a Roth IRA as soon as the Roth conversion is full. You may wish to roll them over as soon as you permit your employer, for instance, so you may proceed making contributions or consolidate accounts.
Possibility #2: Roth IRA rollover with no in-plan conversion
In case your plan doesn’t enable for in-plan conversions, your choices get just a little extra difficult. Finally, in case you’d prefer to convert your after-tax contributions to a Roth account, you’ll want to make use of a Roth IRA—however with out an in-plan conversion choice, this switch might depend as a withdrawal from the 401(okay).
In case your plan tracks contribution sources (which means it separates out pre-tax versus after-tax contributions), you might need the choice to roll out solely the after-tax contributions from the 401(okay) right into a Roth IRA. You possibly can additionally roll the pre-tax contributions and any progress into a conventional IRA, which might not create a taxable occasion.
For instance, say you permit your present employer and have amassed $500,000 in your 401(okay). Your plan supplier does monitor contribution sources and permits you to take a full distribution of the funds as soon as employment is terminated. In the event you wished to keep away from triggering a tax invoice, you could possibly roll the funds into the next IRAs:
- $250,000 of pre-tax contributions roll into a conventional IRA
- $150,000 in Roth contributions roll right into a Roth IRA
- $100,000 in after-tax contributions roll into that very same Roth IRA
In case your plan doesn’t mean you can individually rollover funds primarily based on the contribution supply, you should still have the ability to rollover right into a Roth IRA. The catch is, you’ll be hit with a tax invoice for the pre-tax contributions and untaxed earnings.
In both case, it’s possible you’ll wish to converse to your plan administrator, a monetary advisor, and/or a tax skilled to debate the potential speedy and long-term influence of changing your funds to a Roth 401(okay) or IRA.
Half 4: Issues for Workers
Maybe the most important hurdle in supercharging your 401(okay) with after-tax contributions is figuring out what your plan really permits. Do they assist after-tax contributions? What about in-plan conversions?
As soon as you establish what’s obtainable and potential inside your account, you have to determine how and if you’d prefer to make after-tax contributions. Your plan might provide the choice to make automated after-tax contributions with each paycheck, so you may “set it and overlook it” all year long. Or, it’s possible you’ll must manually request to contribute after-tax {dollars} to the account—particularly in case you’re solely planning to take action once in a while.
Evaluate Your Money Circulation First
In the event you’re contemplating making after-tax contributions to your 401(okay), evaluate your present money movement and different financial savings methods first.
Diverting extra of your paycheck to your retirement account will, naturally, cut back your take-home pay. Are you able to comfortably proceed to afford your way of life and monetary obligations with much less coming into your checking account every month? If not, this will not be the proper time to pursue after-tax contributions.
It’s additionally value contemplating your different choices for saving for retirement or long-term targets. For instance, a conventional brokerage account can also be funded with after-tax {dollars}, and it has no contribution restrict or age restrictions on withdrawals. So long as you maintain the property for greater than a yr, it’s possible you’ll even profit from extra favorable long-term capital features tax remedy. You can too keep extra independence and management over how your funds are invested, since 401(okay) plan choices are sometimes restricted.
That being stated, dedicating extra funds in the direction of your retirement accounts may also help construct lasting monetary safety, so long as you’re not sacrificing your speedy monetary well-being within the course of.
Contemplate Your Tax Bracket Now vs. Later
Bear in mind, pre-tax contributions decrease your taxable earnings now. After-tax contributions produce probably tax-free earnings in retirement. As you construct out your financial savings technique, take your present earnings into consideration. In the event you’re in a decrease tax bracket now than you anticipate to be in a while (possibly you’re nonetheless mid-career or anticipate extra fairness comp-related tax legal responsibility nearer to retirement), it’s possible you’ll really feel extra inclined to only cowl the tax invoice now. If that’s the case, focus your consideration on making Roth contributions and after-tax contributions (which might be then transformed to Roth).
If the alternative is true, it’s possible you’ll be hitting your peak incomes years or in any other case anticipate much less taxable earnings in retirement. If that’s the case, you is perhaps extra inclined to max out pre-tax contributions now, take the deduction whereas your tax fee is excessive, after which contribute what’s left in after-tax {dollars} (that are then transformed to Roth).
Want Assist Reviewing Your Retirement Financial savings Technique?
Zajac Group helps excessive earners profit from their office advantages, from fairness compensation to vital retirement financial savings autos, like 401(okay)s. In case you have extra to contribute to your 401(okay) past the pre-tax contribution restrict, after-tax contributions are a technique to assist develop your financial savings in a tax-deferred manner.
Wish to evaluate your choices extra intently? Ship us a message, we’d be comfortable to evaluate your present financial savings technique and discover alternatives to stability your long-term financial savings targets and tax issues together with your monetary wants right this moment.
Sources:
2 401(okay) restrict will increase to $23,500 for 2025, IRA restrict stays $7,000