What is an After-Tax 401(k)?

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An after-tax 401(k) is an employer-sponsored 401(k) that allows for additional savings above the traditional and Roth 401(k) limits, using after-tax dollars. After-tax 401(k)s differ from Roth 401(k)s in that the earnings will be taxed when withdrawn. Contributions are tax-free when withdrawn. While not all 401(k) plans include an after-tax option, those that do can provide participants with an opportunity for additional retirement savings.

Once you’ve maxed out your traditional and/or Roth 401(k) ($22,500 in 2023, plus a $7,500 catch-up for those age 50 or older), an after-tax 401(k) allows you to continue contributing after-tax dollars up to the lesser of the annual defined contribution limit or an employer-determined limit. Based on the IRS defined contribution limit of $66,000 in 2023 (plus $7,500 in catch-up contributions for those over age 50), this means you could contribute up to an additional $43,500 to an after-tax 401(k) above your traditional and/or Roth 401(k) contributions. Note that the defined contribution limit includes employer matching contributions, which should be considered when determining after-tax 401(k) contribution limitations.

After-tax 401(k) funds grow on a tax-deferred basis. Contributions can be distributed tax-free, while earnings will be taxed as ordinary income.

Conversions & Distributions

You may be allowed to convert after-tax contributions to your Roth 401(k) via in-plan conversions, if your plan allows for it.

For example, a company may allow for an automatic daily Roth in-plan conversion within their plan, which means that contributions will automatically be converted to your Roth 401(k) in the same day they are made. By doing a same-day conversion, you will not accumulate any earnings and therefore the conversions will be tax-free (similarly to many back door Roth IRA contributions).

Other plans may only offer in-plan conversions on a periodic basis. In that instance, you would owe income tax on the earnings portion of the conversion for the tax year in which the conversion is made. If allowed by the plan, you may also be able to take in-service distributions from your after-tax 401(k) in one of two ways:

  • Roll the full after-tax 401(k) balance into a Roth IRA. The contributions that you made can be rolled in tax-free (called a “mega back door Roth contribution”), while the earnings will be subject to income tax, but then can continue to grow tax-free within the Roth IRA.
  • Alternatively, contributions can be rolled into a Roth IRA while earnings are rolled into a Traditional IRA. No immediate tax is due in this case since the Traditional IRA assets will not be taxed until withdrawn.


Mary, a 45-year old high earner, contributes the maximum of $22,500 to her pre-tax 401(k) in 2023, and her employer provides a matching contribution of $6,000, for a total of $28,500. Her employer began offering an after-tax 401(k) in 2023 as well. Based on the 2023 defined contribution limit of $66,000, Mary has $37,500 remaining to contribute to her after-tax 401(k), which she does.

Six months later, following a market rally, Mary’s after-tax 401(k) has grown to $52,000. She decides to process an in-plan conversion to her Roth 401(k). Mary will owe no tax on the $37,500 in contributions but will owe ordinary income tax on the earnings of $14,500 in 2023. The full $52,000 will then grow tax-free within the Roth 401(k) and will remain tax-free when withdrawn.

If instead Mary opted to process an in-service distribution, she could roll the $37,500 in contributions to her Roth IRA and the $14,500 in earnings to her Traditional IRA and would owe no immediate taxes.

Who should utilize these?

After-tax 401(k)s are most beneficial for:

  • High earners who are already maximizing their traditional/Roth 401(k) contributions and are looking to save more for retirement.
  • Maximizing tax-deferred growth during working years.
    • This is especially beneficial if your plan offers in-plan conversions on an automatic or consistent basis.
  • Maximizing Roth savings since after-tax contributions can be rolled into a Roth IRA or Roth 401(k) and will not be taxed when withdrawn.
    • Remember that any earnings will be taxed as a conversion if rolled into a Roth account or will need to be rolled into a Traditional IRA/401(k) and then will be taxed when withdrawn.

While not all plans will offer this as an option, after-tax 401(k)s are becoming more common and can be a powerful option to maximize retirement savings in a tax-friendly manner, particularly for those who intend to utilize Roth assets as legacy funds for their heirs.

Your Freestone Client Advisor can help you review your plan to determine whether an after-tax 401(k) option is available and can analyze your unique situation to determine if this is an appropriate vehicle with which to enhance your retirement savings.

Important Disclosures: Nothing in this article is intended to provide, and you should not rely upon it for, accounting, legal, tax or investment advice or recommendations. We are not making any specific recommendations regarding any financial planning or tax planning strategy, and you should not make any financial planning or tax planning decisions based on the information in this article. The intention of this article is educational, and it is intended only to discuss a few limited aspects of a very complex tax planning strategy. This article is not a comprehensive or complete summary of considerations regarding its subject matter. Each individual is in a different situation and has different items to address, and the options in this article are not appropriate for everyone. Please consult your Freestone client advisor and a professional tax and legal advisor regarding options specific to your needs.

Posted By: Stephanie d'Ippolito, CFP®

Stephanie d’Ippolito, CFP®, is our Managing Director of Financial Planning. She is passionate about helping people and believes that financial planning can be a valuable tool for clients to understand and solve their unique financial problems. She lives in Seattle with her husband and two dogs, Toby and Thurman.