Is 401k pre tax or after tax

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An after-tax 401(k) gives you the ability to supersize your retirement contributions, helping you reach your investment goals even faster. You can still have an after-tax 401(k) even after you’ve maxed out your traditional or Roth 401(k) contributions for the year, if your employer allows it.

Here’s how an after-tax 401(k) works, and what you need to know to see if it’s right for you.

How an after-tax 401(k) works

An after-tax 401(k) lets workers take even greater advantage of their employer-sponsored retirement plan by giving them an extra way to save more for their golden years.

An after-tax 401(k) allows savers to put after-tax money into a 401(k) account, and that money can grow on a tax-deferred basis until retirement. When it comes time to take a distribution, contributions can be withdrawn tax-free (since tax has already been paid on them). Meanwhile, any earnings on that money will be considered taxable and will be taxed as ordinary income.

An after-tax 401(k) may sound like it’s a Roth 401(k), which also uses after-tax money, but don’t confuse the two. The Roth 401(k) offers different – and better – tax advantages.

After-tax 401(k) contributions

You can add a lot more to an after-tax 401(k) than in a core 401(k) plan. Employee contributions are limited to $20,500 (for 2022) plus an additional $6,500 catch-up contribution for those age 50 and older. But the after-tax 401(k) plan allows you to contribute up to a combined total of $61,000 (for 2022, or $67,500 for those 50 and older), including any employer matching funds.

Many 401(k) plans allow you to contribute to an after-tax 401(k) plan at the same time as you’re contributing to your core 401(k) plan. But the after-tax plan’s advantages are not quite as strong as ones offered by the core plan. So an after-tax 401(k) works best for those who are able to max out their contributions to a traditional or Roth 401(k) and want to stash more money in a retirement plan.

The catch is whether your employer offers the after-tax 401(k) — and many employers do not, even if they offer a traditional or Roth 401(k) plan.

After-tax 401(k) benefits

The after-tax 401(k) is an extension of many of the benefits that already exist in the core 401(k) retirement account, but it also offers additional benefits:

• Contributions are pulled directly from your paycheck. Just like your core 401(k) contributions, you can have contributions to your after-tax 401(k) pulled straight from your paycheck, making it easier to participate.
• Tax-advantaged growth of your contributions. The after-tax 401(k) allows your contributions to grow on a tax-deferred basis. When you withdraw money in retirement, you’ll be taxed only on the earnings, not the contributions.
• Expands the 401(k) contribution maximum. If you’re looking to put away more into a tax-advantaged retirement account, the after-tax 401(k) lets you do it.
• Pre-selected investment funds. Just as you do in your core 401(k), you’ll be limited to whatever investment choices are available in your specific plan.
• Expanded contributions. The after-tax 401(k) expands your ability to contribute up to $61,000 (in 2022) annually or $67,500, if you’re at least 50 years old.
• After-tax 401(k) contributions can be withdrawn at any time with no tax or penalty. Unlike the rigid rules on withdrawals in a core 401(k), the after-tax 401(k) allows you to withdraw contributions at any time without tax or penalty, giving you a lot of flexibility.
• The plan is portable. Like your core 401(k), you’ll be able to move your after-tax 401(k) to a new employer or to another retirement plan.
• After-tax contributions can be rolled over into a Roth IRA. One of the advantages of the after-tax 401(k) is that you can roll over your contributions to a Roth IRA, potentially even while you’re still with your employer. Experts routinely call the Roth IRA the best retirement account available to those living and working in the United States.
• No income limits on participation. Unlike the IRA, the after-tax 401(k) does not have an income limit, so regardless of what you earn, you’ll be able to participate if your employer offers the plan.

The ability to roll over your after-tax 401(k) contributions to a Roth IRA while still with your employer is a valuable feature that effectively allows you to stash more money in your Roth IRA, and you can do so in some cases with minimal tax consequences, too. This rollover is called a “mega-backdoor Roth IRA,” and it’s recently been in the crosshairs of Congress. It could be eliminated in the future, though the subject remains up for discussion.

Can I contribute to an after-tax 401(k) and another 401(k)?

You can contribute to an after-tax 401(k) and another 401(k) or many other 401(k) plans. The key point to remember is that your contributions as an employee may not exceed the annual cap on contributions, which is $20,500 for 2022, or $27,000 for those age 50 and older.

On top of that employee contribution, you may make contributions as an employer, for example, if you’re self-employed and have a solo 401(k) or are able to participate in profit-sharing plans.

Between your employee contributions and your employer contribution, you are limited to an annual maximum of $61,000 for 2022, or $67,500 for those age 50 and older.

Bottom line

An after-tax 401(k) is great if you want to stash away more cash each year in a tax-advantaged retirement account, and it can help you reach your retirement goals sooner. As you’re planning, however, make sure that the 401(k) offers investments that meet your needs, or you may end up putting money into the wrong investment just to get a tax advantage from the account.

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