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Can You Make After-Tax 401(k) Contributions?

The majority of 401(k) contributions are pre-tax. But in some plans, it’s possible to make after-tax 401(k) contributions. Here’s how.

May 12, 2022

This article is provided for informational purposes only and should not be construed as legal or investment advice. Consult with a professional financial or investment advisor before making investment decisions.

A 401(k) is a powerful tool for retirement savings and investing. Many employers now offer them, allowing workers to save part of their paycheck towards their long-term savings goals. 

By default, 401(k) contributions are pre-tax. But, can you make after-tax 401(k) contributions? And if so, how? Find out more below. 

401(k) basics

A 401(k) plan is an employer-sponsored retirement plan. They are quite common, with research showing that around 52% of employers offer some sort of 401(k) plan. 

Workers can contribute to their 401(k)s, earn tax breaks and save for retirement. Some employers will even match 401(k) contributions — meaning they may put in some extra money to enhance contributions made by employees. 

Pre-tax vs. after-tax 

From a tax perspective, there are two different ways that 401(k) contributions can be treated: 

  1. Pre-tax 

  2. After-tax 

A third option, Roth contributions, will be discussed more below.

Are 401(k) contributions pre-tax? 

Many 401(k) contributions are “pre-tax” by default. This means that the money you put into a 401(k) is not taxed in the year you deposit it. Instead, it’s deposited before it’s taxed. 

401(k) contributions reduce your taxable income 1:1. If you earn $50,000 and contribute $2,000 to your 401(k), your taxable income will be reduced to $48,000. 

This creates an upfront tax break for you in the current year. You’ll pay a bit less in federal income taxes because any funds you deposit into your 401(k) will not be subject to taxes. 

These contributions are known as “pre-tax,” because money is put into the account before it’s subject to taxes. When you eventually withdraw the funds from the account in retirement, you’ll owe income tax at that point. 

How do after-tax 401(k) contributions work? 

After-tax contributions work differently because they don’t earn an upfront tax break. After-tax 401(k) contributions are essentially “bonus” contributions that don’t get the same benefits as standard contributions (or Roth contributions).

You’ll pay tax on money that you put into a 401k via after-tax contributions. When you withdraw that money in retirement, you won’t owe taxes on the contribution amount — but you will owe taxes on any profits that you have made. 

After-tax vs. Roth contributions 

It’s easy to confuse after-tax contributions with Roth contributions. 

After-tax contributions typically refer to after-tax money added to a traditional (pre-tax) 401(k). Roth contributions are made to a dedicated Roth 401(k), which is much less common. 

Roth contributions lead to tax-free growth because money withdrawn in retirement is not subject to taxes (even investment profits).

Profits on investments made with after-tax contributions are still taxed in retirement and they don’t earn an upfront tax break. So, the real benefit of these contributions is that they allow you to save more than the designated $20,500 contribution limit (more on this below).

To be clear, after-tax contributions are not taxed in retirement (because you paid taxes on that money before contributing it). However, any profits/investment gains from those contributions will be subject to taxes in retirement. 

As for Roth 401(k)’s, these are less common. The debate of traditional vs. Roth is highly dependent on your individual circumstances and preferences — there’s no clear right or wrong choice. 

Using after-tax contributions to save more for retirement

Here’s where after-tax contributions come into play: They allow you to save more than the standard contribution cap ($20,500 per year for those under 50). 

Whether you have a standard or a Roth 401(k), you will be able to contribute up to $20,500 per year, plus an additional $6,500 per year for those over 50. 

But if you have a traditional 401(k) — and your plan allows it — you may be able to make additional contributions in excess of that $20,500 limit. 

For example, you could max out the $20,500 contribution with standard contributions (earning you a hefty tax break). Then you could contribute an additional $10,000 in after-tax 401(k) contributions. You wouldn’t earn a tax break on this money — but you’d have the benefit of saving more for retirement

You could theoretically contribute up to $61,000 total per year using a combination of pre-tax and after-tax contributions. If you’re working towards early retirement, that could be a game changer. 

Can you make after-tax 401(k) contributions?

Yes, you can make after-tax 401(k) contributions — if your plan allows it. Unfortunately, many do not.  

Fewer than 20% of 401(k) plans offer after-tax contributions, according to a Vanguard study

But if your plan does support after-tax contributions, you can potentially use these to maximize the amount of money you can save for retirement. 

Note: You could also look into opening a Roth 401(k) account if your employer allows it. This is typically a separate account and allows you to make Roth contributions.

When do after-tax 401(k) contributions make sense?

After-tax contributions are typically well suited for high-income earners who are already maxing out other retirement savings vehicles. 

With a standard 401k, you can contribute up to $20,500 per year. Combined with after-tax contributions, you could potentially contribute up to $61,000 per year. 

From there, you can also employ more advanced strategies to optimize taxes. For example, some people choose to withdraw these after-tax contributions each year and roll them over into a Roth IRA. 

This creates an upfront tax hit — but it allows you to convert those after-tax contributions into an account that offers tax-free growth. 

These strategies can get complex, so it’s important to work with a qualified tax advisor. 

Optimize your retirement strategy

For even more on retirement savings strategies, read through these helpful resources:

Finally, if debt is holding you back from your financial goals, paying it off is a top priority. 

Tally† may be able to help. Tally is a personal finance app that can help qualifying applicants save money by paying off high-interest credit cards with Tally’s lower-interest line of credit. 

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