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After Tax 401k Contributions

As you may have guessed from the name, after-tax 401k contributions-a.k.a. nondeductible voluntary contributions-are taken from your paycheck after taxes have already been withheld. Therefore, you get no immediate tax break from making these contributions. However, any earnings on your after-tax money will always grow tax-deferred.

What are the benefits, you ask?

Well, first off, know that not all plans offer the option of making after-tax contributions to their 401k. They may now, instead, offer Roth 401k which is even more beneficial. For those that do still offer straight after tax 401k contributions, there are still some benefits.

For one, you will never owe any more taxes on the actual contributions you make when you take a distribution during retirement. You’ll pay taxes on the money your contributions have made, though. This is a good way to assist in diversifying your tax liability during your retirement years.

Also, after tax 401k contributions are not subjected to the same limitation rules that pretax contributions are. So if you are a highly paid individual and you are maxing out your pretax contributions, making after-tax contributions is a good way to invest some extra money and shelter your earnings from the hands of the IRS.

It’s important to note here that the handling of in-service withdrawals for after tax 401k contributions vary greatly from the handling of in-service withdrawals of roth 401k money. We cover this information in our 401k withdrawals section.

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