While both involve making contributions using after-tax dollars, the two differ in a few key ways.
First, Roth 401(k) contributions are subject to the usual 401(k) contribution limits. In 2019, that limit is $19,000, plus a $6,000 catch-up limit for individuals aged 50 and older. After-tax 401(k) contributions are not considered to be “deferrals” and are not subject to the $19,000/$25,000 limit. Therefore, after-tax 401(k) contributions can be higher as long as total 401(k) contributions don’t exceed $56,000.
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.
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.
What is this “back door” business with after-tax 401(k) contributions?
A back door Roth IRA is a method used by taxpayers to place retirement savings in a Roth IRA, even if their income is higher than the maximum the IRS allows for regular Roth IRA contributions. After-tax 401(k) contributions can eventually be converted to Roth IRA without including earnings. This allows individuals whose income exceeds IRS Roth IRA contribution limits a “back door” to Roth IRA.