Is there a difference between a Roth 401(k) and After-tax 401(k)?

July 7, 2022

Is there a difference between a Roth 401(k) and After-tax 401(k)?

A 401(k) plan is a self-funding employer sponsored retirement plan that allows employees to invest with pre-tax money that grows tax deferred. This reduces your taxable income now but will be taxed when you take it in retirement. Most 401(k) plans also offer the Roth 401(k) which allows employees to invest with after-tax money that grows tax-free. The after-tax contributions do not reduce your taxes now but will not be taxed when you take the money out in retirement. Some plans also offer an after-tax 401(k) which most people think is the same thing, but it is not.

Roth 401(k) contributions have the same limitations as traditional 401(k) contributions. For example, workers can contribute up to $20,500 per year, with an additional catch-up contribution of $6,500 allowed for workers ages 50 and older. These limits do not include your employer’s match.

After-tax 401(k) contributions are like Roth contributions in that they’re made with after-tax dollars, but after-tax contributions aren’t subject to the $20,500 limit, they’re subject to the overall limit on contributions, which, in 2022, is $61,000 (or $67,500 with the catch-up contribution).

If your plan allows, the after-tax option should be considered only after contributing the annual limit to your traditional or Roth 401(k). If you’re able to participate, there’s a provision in the tax law that allows after-tax contributions to be converted to Roth contributions. Since you’ve already paid taxes on the contributions, the conversion would only require that you pay taxes on any earnings you’ve accumulated.

We have different strategies for your individual situation. Contact us to find out more.


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