# After-tax 401(k)

This article contains details specific to United States (US) investors. It does not apply to non-US investors.

An After-tax 401(k) is a type of 401(k) sub-account, with different rules from traditional and Roth 401(k) accounts. The rules, and even the availability, for this sub-account may vary considerably from one company to another. An investor should reference their Summary Plan Description to confirm all plan features such as availability, limits, and matching contributions.

It is typically used in a strategy informally known as the mega-backdoor Roth, in order to rollover money to Roth accounts far in excess of normal contribution limits. (See the mega-backdoor Roth article for details.)

## After-tax 401(k) limits

Assume that:

{\displaystyle {\begin{aligned}\quad A&={\text{employee contribution to after-tax 401(k) account}}\\\quad TR&={\text{employee contribution to traditional 401(k) and Roth 401(k) accounts}}\\\quad E&={\text{employer match}}\\\end{aligned}}}

Then the 2021 IRS limits, for employees under age 50, are:

${\displaystyle TR\leq 19500\quad {\text{and}}\quad A\,\leq 58000-(TR+E)}$

Additionally, each of the above must be less than the employee's wages.

Said in words: Traditional and Roth accounts share an employee (under age 50) contribution limit up to $19,500 per person for 2020,$19,000 for 2019, or 100% of the employee's compensation, whichever is less. However, Section 415(c)(1)(A) limits total contributions to defined contribution plans to $57,000 in 2020 and$58,000 in 2021, or 100% of the employee's compensation, whichever is less.[1][2] The limit for an after-tax 401(k) is the lesser of the difference between the amount already contributed by the employer and employee, and the Section 415 limit, or 100% of employee compensation.[3]

To elaborate, consider an individual with an annual salary of $100,000. She maxes out her 2021 Traditional 401(k) contribution ($19,500) with a company match of 5%. How much can she contribute to the after-tax 401(k)?

Individual Contribution

Company Match Max After-Tax-401k Contribution
19,500 100,000 * 0.05 = 5,000 58,000 - (19,500+5,000) = 33,500

This same individual has both a traditional and a Roth 401(k). She then makes equal contributions to each 401(k). Her 2020 individual contribution cap of \$19,500 has not changed. Assuming the employer match is same for both the traditional and Roth 401(k)s, the calculation remains the same as outlined above.

## Taxation

Post-1986 after-tax contributions to the after-tax subaccount are not tax deductible, they are not taxed upon distribution. The earnings however, are taxed as ordinary income upon distribution. Distributions from the account must have a pro-rata share of both contributions and earnings. (IRS Notice 87-13)

The IRS issued Notice 2014-54[4] which allows distribution sent to multiple destinations at the same time. An example of a distribution enabled by the notice is to have the contributions sent to a Roth IRA, and the earnings sent to an IRA.

Due to the lack of deduction and ordinary income taxation, the tax characteristics are similar to a nondeductible IRA. If the money grows over long periods of time, the tax characteristics might be less favorable then investing in a taxable account.

An investor might choose to to make after-tax contributions if they have a plan to convert them to Roth, ideally timing is yearly, but if an investor is leaving a company within a few years, it might still be beneficial to make contributions.

Pre-1987 after-tax contributions do not have the pro-rata distribution rule as long as the recordkeeper tracked these dollars. These types of after-tax contributions are not common, but can be found from time to time in older folks who have chosen to maintain their 401k at their previous place of employment.