Many people are familiar with the two main ways to save in a 401k. Traditional contributions reduce taxable income today and grow tax deferred until retirement. Roth contributions use after-tax dollars and do not offer an upfront deduction, although qualified withdrawals are tax free. These options cover most savers, but some plans include another feature that can change how much you are able to contribute altogether.

The after-tax 401k gives certain employees a path to save beyond the standard limits. It behaves differently from both traditional and Roth contributions, and it can create planning opportunities for people who want to maximize their annual savings. 

Read on to understand how this third bucket works, what makes it unique, and the situations where it may be helpful.

Table of contents

What Is an After-Tax 401k?

An after-tax 401k allows employees to contribute beyond the regular annual employee deferral limit. It uses post-tax dollars, which is why many people initially compare it to a Roth 401k. The two accounts share that single feature, but the tax treatment is not the same.

Here is the key distinction to keep in mind:

✅ Roth 401k

  • Funded with post-tax income.
  • Contributions and earnings can grow tax free.
  • Qualified withdrawals in retirement are tax free when age and holding period requirements are met.

✅ After-Tax 401k

  • Funded with post-tax income.
  • Contributions can be withdrawn tax free at any time.
  • Earnings are taxable when withdrawn unless moved into a Roth account through a permitted rollover.

The after-tax 401k essentially separates the contribution base from the earnings. That structure can create opportunities for higher total savings, but it also introduces different tax considerations.

📝 Note: Some employers may use different internal labels for this account type. The defining feature is that the contributions are not Roth contributions and the earnings do not receive Roth tax treatment unless converted.

When Does Contributing to an After-Tax 401k Make Sense?

Many people wonder why an after-tax 401k may be useful when Roth withdrawals are tax free in retirement and after-tax 401k earnings are not. The value comes from two situations where this account can offer more flexibility than standard employee deferrals.

Below are the two primary reasons employees consider after-tax contributions.

Reason #1: Put More Money Into a 401k

Employees who have already reached the annual employee deferral limit may still want to save more inside their workplace plan. An after-tax 401k provides that option. Traditional and Roth 401k employee contributions for 2025 are capped at $23,500 ($31,000 for people age 50 and older). These limits apply only to the employee portion.

Defined contribution plans also have an overall annual additions limit under Section 415(c). For 2025, the cap is $70,000. After-tax contributions fill the space between what you already contributed as an employee and the total amount the plan can accept for the year.

✏️ Hypothetical Examples:

  • Maxing out a Roth 401k at $23,500 still leaves $46,500 of potential room for after-tax contributions.
  • After-tax contributions do not generate a tax deduction, although the earnings grow tax deferred until withdrawal.

📝 Note: The actual amount available depends on how much the employer contributes, since employer contributions also count toward the Section 415(c) limit.

Reason #2: Do a Mega Backdoor Roth Conversion

Many employers that offer after-tax contributions also allow in-plan Roth rollovers or in-service distributions. These features make the “mega backdoor Roth” strategy possible. It allows significantly more dollars to move into a Roth account than the IRS normally permits.

Here is the general sequence:

  1. Contribute to the after-tax 401k up to the remaining space under Section 415(c).
  2. Move those dollars, when allowed by the plan, through:
    • An in-plan Roth rollover to the designated Roth 401k, or
    • An in-service distribution to a Roth IRA.
  3. Contributions are not taxed again because they were made with post-tax dollars.
  4. Any earnings included in the rollover are taxable unless transferred to a pre-tax account.

A mega backdoor Roth strategy requires specific plan features:

✅ After-tax employee contributions.
✅ Either in-plan Roth rollovers or in-service distributions to a Roth IRA.

Plans that include both features give employees the widest flexibility.

📌 Also read: 50 Notable Companies That Offer The Mega Backdoor Roth

How an After-Tax 401k Supports a Mega Backdoor Roth Strategy

Large contributions into a Roth account are normally restricted by annual limits and income rules. A mega backdoor Roth strategy changes the math when a plan supports after-tax contributions and the movement of funds into a Roth account. 

The hypothetical scenarios below illustrate how the mechanics can work.

Hypothetical Example #1: Roth Solo 401k

Consider a self-employed saver with a Solo 401k who wants to maximize contributions for 2025. The overall limit for defined contribution plans under Section 415(c) is $70,000. As the employee of the business, the saver can defer up to $23,500 and choose between a traditional or Roth Solo 401k.

Assume the saver elects Roth and contributes the full $23,500. That leaves $46,500 of space under the annual limit. Employer contributions are also allowed in a Solo 401k, and under SECURE 2.0, employer nonelective or matching contributions may be designated as Roth if the plan permits and the contributions are fully vested.

The saver decides to use the after-tax 401k to reach the full limit. They contribute $46,500 to the after-tax account and then complete an immediate Roth conversion within the plan. The result is a total of $70,000 deposited into the Roth Solo 401k for the year.

📝 Note: Timing matters. Many Solo 401k providers encourage prompt conversion to limit the amount of earnings that could become taxable during rollover.

Hypothetical Example #2: Roth IRA

Now consider an employee earning too much to contribute directly to a Roth IRA in 2025. Roth IRA eligibility phases out for single filers between $150,000–$165,000 of MAGI and is fully phased out at $165,000. For married filing jointly, the phase-out runs from $236,000–$246,000.

Assume the employee contributes $23,500 to the Roth 401k offered by their employer and receives a $3,000 employer match. These deposits total $26,500, leaving $43,500 available under the $70,000 annual additions limit.

Because the plan also offers after-tax 401k contributions, the employee contributes $43,500 to the after-tax bucket. They then complete an immediate rollover to a Roth IRA, directing any earnings to a pre-tax account if desired to avoid taxation on those earnings. This step is permitted because income limits apply only to Roth IRA contributions, not to rollovers.

The basis from after-tax contributions is not taxable on rollover. Earnings included in the conversion would be taxable unless moved into a pre-tax destination.

📝 Note: The employee could have chosen to move the funds to the Roth 401k instead. Some savers prefer a Roth IRA because of the broader investment options typically available there.

Should I Transfer My After-Tax Funds Into a Roth 401K, Roth IRA, or Roth Solo 401K?

Once after-tax contributions are ready for a mega backdoor Roth conversion, the next step is choosing the Roth destination. Some savers have access to more than one option. The goal is to select the account that aligns with your plan features, investment preferences, and cost considerations.

A broad rule of thumb is to compare each account’s investment flexibility and associated fees. Many investors prioritize the vehicle with the widest open-architecture menu, although the right choice depends on personal circumstances and what each plan allows.

Here is how the main Roth destinations typically differ:

Roth 401k (Employer Plan)

  • Offers convenience by keeping funds within the workplace plan.
  • Investment choices are limited to the plan’s selected menu.
  • Fees and fund lineups vary by employer and recordkeeper.

Roth IRA

  • Provides the broadest access to traditional investment options, including most individual stocks, bonds, mutual funds, and ETFs.
  • Often has lower administrative fees and a wider range of custodians.
  • A common destination for mega backdoor Roth conversions due to flexibility.

Roth Solo 401k

  • Some self-directed versions allow investments beyond marketable securities, such as real estate or private placements, depending on plan terms.
  • Digital-asset access depends on the provider and regulatory guidance.
  • Not all Solo 401k plans offer expanded menus, so plan documents should be reviewed carefully.

📝 Note: Plan rules ultimately determine what is possible. Some employer plans or Solo 401k providers restrict in-plan rollovers, in-service distributions, or available asset classes. Comparing features can help you identify the most suitable destination.

📌 You can compare the best Solo 401k plan providers here.

What’s the Difference Between a Roth 401k and an After-Tax 401k?

Both accounts use post-tax dollars, which often leads people to assume they work the same way. The tax treatment diverges once contributions are in the plan.

A Roth 401k allows contributions and earnings to grow tax free. Qualified withdrawals in retirement are not taxable when age and holding-period requirements are met. This structure gives savers predictable tax treatment on the back end.

An after-tax 401k treats only the contribution base as tax free. Earnings grow tax deferred and are taxable when withdrawn unless they are moved into a Roth account through an eligible rollover.

Here is the summary:

✅ Roth 401k: Tax-free growth and tax-free qualified withdrawals.
✅ After-Tax 401k: Contributions come out tax free. Earnings are taxable unless converted.

Many savers choose to maximize employee elective deferrals — traditional or Roth — before considering after-tax contributions. The after-tax bucket becomes useful when someone wants to contribute above the employee limit or when a plan supports a mega backdoor Roth strategy.

Final Thoughts

An after-tax 401k adds another layer to workplace retirement savings by allowing contributions beyond the standard employee limit and, when permitted by the plan, enabling larger Roth rollovers. Its tax treatment differs from both traditional and Roth accounts, which affects how contributions, earnings, and future withdrawals are handled.

Some savers use after-tax contributions to increase total annual savings. Others use them to complete a mega backdoor Roth strategy. The actual benefit depends on plan rules, available rollover options, and personal financial objectives. Each of these elements shapes how an after-tax 401k may fit into a long-term retirement approach.

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.