How does a Roth 401(k) work?
A Roth 401(k) is a type of employer-sponsored retirement savings plan in the US that combines features of a traditional 401(k) with those of a Roth IRA. An employer may match contributions and determine vesting schedules. Employees must use the financial institution or broker that the employer selects.
How does an After-Tax 401(k) work?
An After-Tax 401(k) is a retirement savings option within a traditional 401(k) plan that allows contributions beyond Roth or pre-tax limits. Employers may offer this feature and set plan rules, including rollover options. Earnings grow tax-deferred but are taxable when withdrawn unless converted.
Isn’t a Roth 401(k) the same as an after-tax 401(k)?
First, Roth 401(k) contributions are subject to the usual 401(k) contribution limits. In 2025, that limit is $23,500, plus a $7,500 catch-up contribution for individuals aged 50 and older. After-tax 401(k) contributions are not considered to be “deferrals” and are therefore not subject to the $23,500 / $31,000 limit.
As a result, after-tax 401(k) contributions can be higher, so long as total 401(k) contributions (including employer contributions) do not exceed $70,000, or $77,500 if you're 50 or older and eligible for catch-up contributions.
Roth 401(k) Contributions
Roth 401(k) contributions are made with after-tax dollars and are subject to the annual elective deferral limit. In 2025, individuals can contribute up to $23,500, with an additional $7,500 catch-up contribution available to those aged 50 and older. The IRS adjusts these limits annually for inflation. This Roth 401(k) max contribution for 2025 applies to your combined traditional and Roth 401(k) elective deferrals.
The key benefit of Roth contributions is their tax-free growth and tax-free qualified withdrawals. As long as certain conditions are met, such as holding the account for at least five years and reaching age 59½, earnings on Roth 401(k) contributions are not taxed upon withdrawal.
In the debate of Roth vs after-tax, Roth contributions generally offer greater long-term tax advantages if you're eligible and plan ahead. Contributions are taxed upfront, but your money grows and is withdrawn tax-free under the right conditions.
After-Tax 401(k) Contributions
After-tax 401(k) contributions, while also made with after-tax dollars, are not classified as elective deferrals and are therefore not limited to $23,500 or $31,000. Instead, they fall under the total 401(k) contribution limit, which includes employee and employer contributions. For 2025, this total limit is $70,000, or $77,500 with catch-up contributions for individuals aged 50 and older.
This allows high earners to contribute more than the standard Roth or traditional 401(k) limit, as long as the total plan contributions don’t exceed the annual cap. However, the tax treatment of after-tax contributions at withdrawal is less favorable: while the original contribution is not taxed again, any earnings are taxed as ordinary income when withdrawn.
Some plans offer a strategy known as the “mega backdoor Roth,” where after-tax contributions can be converted to a Roth IRA. This allows earnings to grow tax-free going forward. However, this requires careful timing and may trigger tax on earnings at conversion. Consulting with a tax advisor or CPA is highly recommended before pursuing this strategy.
The IRS may adjust the contribution limits annually for inflation.
The tax treatment of Roth 401(k) contributions and after-tax contributions is also different at withdrawal. While both contributions are tax-free at withdrawal, any earnings generated on Roth 401(k) contributions are tax-free but earnings generated on after-tax contributions are only tax-deferred and are taxed as ordinary income at the time of distribution.
A Roth 401(k) offers predictable, long-term tax-free growth and tax-free withdrawals in retirement, making it ideal for those who anticipate being in a higher tax bracket later. In contrast, after-tax 401(k) contributions are better suited to high-income earners who have maxed out traditional or Roth contributions and want to contribute more, with the option of converting to Roth for future tax benefits.
Frequently Asked Questions
What happens to after-tax 401(k) contributions when I leave my job or retire?
Your after-tax contributions can be rolled into a Roth IRA and any earnings can be rolled into a Traditional IRA. If you want to convert any of the earnings to Roth, taxes would be due—on the earnings portion only.
Can you contribute to an IRA and 401k?
Yes—these two account types are independent of each other and managed separately. Contributing to both is a savvy strategy for investors who can afford it, but may present challenges. For example, you may encounter limits on your ability to deduct contributions based on your income, and deducting your IRA contributions may not be straightforward if you participate in both types of plans. Both plans require you to stay within your accounts’ contribution limits.
Who qualifies for a Roth 401(k)?
A Roth 401(k) is generally available to any employee whose employer offers this retirement savings option as part of their benefits package. It may be a better option, compared to a traditional 401(k), for lower-income employees who anticipate moving into a higher tax bracket in the future, as a Roth 401(k) allows the individual to pay taxes on contributions at their current lower rate.
What is a Backdoor Roth IRA, and who should consider using it?
A Backdoor Roth IRA is a strategy that allows high-income earners to contribute to a Roth IRA even if their income exceeds the IRS limits for direct contributions. It involves making a non-deductible contribution to a Traditional IRA and then converting that amount to a Roth IRA. Because the contribution was already taxed, and if the conversion is done promptly before the investment earns income, there’s little or no additional tax due. This approach is especially useful for individuals who want to take advantage of the Roth IRA’s tax-free growth and withdrawal benefits but are otherwise ineligible due to income restrictions. However, those with existing pre-tax IRA balances should be aware of the IRS’s pro rata rule, which could make part of the conversion taxable. You’ll need to file Form 8606 with your tax return to report the non-deductible contribution and conversion.