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After-Tax Investing: Essential Need-to-Knows

Allworth co-founder Scott Hanson helps explain the differences between Roth 401(k)s, Roth IRAs, and after-tax 401(k) contributions.


People who save well and plan out their retirement account money maze years in advance tend to be extremely optimistic but also realists at heart.

That is, they prepare for the future, which is forward-thinking, but they work hard and refuse to leave their financial well-being to chance, which makes them realists.

And who can blame them? (Most good advisors are built much the same way.)

Because when it comes to investing in retirement accounts, not only are there a million considerations, but mistakes and even accidental oversights can result in expensive consequences. (And there are only so many hours to monitor your money each day.)

So, you’re saving for the future, and you understand that there are some after-tax retirement account investment options available to you. All things being equal, should you contribute to a Roth IRA? A Roth 401(k)? Or should you consider making “after-tax” 401(k) contributions?

Here are some basics for investing in retirement accounts such as Roth IRAs, Roth 401(k)s, and traditional 401(k)s after you’ve already paid tax on the income.


Basics of Roth 401(k)s

No question about it, Roth 401(k)s are versatile, terrific savings vehicles. Having appeared on the scene only as recently as the early 2000s, these share a basic root structure with a traditional 401(k) the same way that a Roth IRA shares the genetics of its traditional IRA cousin.

No matter which vehicle you use, and while there are numerous other considerations, some of the most common determiners for which account(s) you should utilize to build your future will depend on things like which accounts are available to you, your age, your future income, and when you will need the money.

First, you might be asking yourself: What about traditional IRAs?

Good question. Traditional IRAs can be a terrific way to save, but for this article I’m focusing on “after-tax” (meaning, that, unlike a traditional IRA, you invest in these unique Roth vehicles after you have already paid taxes on the money).

That said, Roth 401(k)s consist of many of the best aspects of traditional 401(k)s (which are also employer sponsored) and Roth IRAs (which are not employer sponsored), so this is an ideal place to begin.

Though not as widespread as traditional 401(k)s, money invested in a Roth 401(k) is automatically taken out of your paycheck and allocated according to your investment choices and risk tolerances into your company’s defined contribution plan. Unlike a Roth IRA (which I’ll cover below), there are no income limits to contribute to a Roth 401(k), and, if you’re fortunate, your employer might even offer you “free money” in the form of a matching contribution.

Good stuff.

Unlike most traditional 401(k)s, with a Roth 401(k) option, you pay income tax on the contributions before that money is invested. So, the big advantage here is that any future growth is tax free, and that means you won’t be hit with income taxes on the principal or the growth when you withdraw the money in the future.

Lastly, Roth 401(k)s have the same contribution limits as traditional 401(k)s, which for 2024 is $23,000 if you are under age 50, and $30,500 if you are age 50 or older.


Basics of Roth IRAs

Established by the Taxpayer Relief Act of 1997, as touched upon above, what differentiates these vehicles from most traditional 401(k)s is that Roth IRAs, just like Roth 401(k)s, are funded with after tax dollars.

But, while Roth 401(k)s and Roth IRAs are both funded with after-tax dollars, making these both great vehicles for you folks who expect to have a higher income later in life, Roth IRAs have income limits, while employers-sponsored Roth 401(k)s do not.

That’s right. If you are single and your 2024 Modified Gross Income is over $161,000 (or $240,000 for those of you who are married and file jointly), you won’t be able to contribute. Additionally, like its cousin, the traditional IRA, the annual contribution limit for those under 50 years of age for a Roth IRA is $7,000 (but jumps to $8,000 if you are age 50 years old or older).


Basics of “after-tax” 401(k) contributions

The most popular employer sponsored defined contribution plan, and arguably, the most popular retirement preparation vehicle, period, a vast majority of the public view 401(k)s as strictly pre-tax savings accounts that your company offers you in lieu of a pension.

401(k)s are generally great savings vehicles, and over 80 million people contribute to one.

But what some people don’t realize is that, at least in some plans, you can actually contribute money to your 401(k) after it’s already been taxed.

So, although you don’t earn the initial tax-deduction (because pre-tax 401(k) contributions don’t count as income today), like both Roths above, the investment earnings on money deposited after-tax in a 401(k) also grows tax free.

There are some other nifty advantages to jumping on the after-tax 401(k) contribution train. For instance, if you are age 50 or older, in 2024, you’re limited to $30,500 in pre-tax 401(k) contributions.

Just like the Roth 401(k). Nothing wrong with that.

But if you have a plan that allows you to make “pre-tax” and “after-tax” 401(k) contributions, your combined pre-tax and post-tax contribution amount jumps up to a not-too-shabby $76,500, which means that $46,000 of that will be allowed to grow and be withdrawn tax free.

The downside to after-tax 401(k) contributions are that many employers don’t offer plans with that option (ask your advisor or your HR department), and that rolling your after-tax contributions into a Roth IRA (something you will almost certainly want to do) is typically only allowed after you’re no longer working for the employer who sponsored the plan.


In the end, it’s important to remember that your situation is unique. So, while the information above should be used for reference, it is not intended as specific financial or investment advice. Simply, I strongly urge you to speak with your fiduciary advisor early and often about whether a Roth IRA, Roth 401(k), or a pre-tax and post-tax 401(k) contribution approach - or possibly even some creative combination of these - is the best approach for you.