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Super-Size your Roth with After-Tax 401(k) Contributions

June 11, 2021
  • Making after-tax contributions in a Defined Contribution Plan can be a great strategy for 401(k) participants to fund a Roth account.
  • Converting after-tax contributions to a Roth can limit future tax liabilities and establish a tax-advantaged legacy asset.
  • Given ERISA regulations, this strategy is ideal for small business owners, entrepreneurs, and Solo 401(k) participants.

Retirement plan participants should consider making after-tax contributions to boost savings in their Defined Contribution (DC) Plan after meeting the elective deferral limit.  After-tax contributions are funded through payroll contributions after income taxes have been deducted.  The benefit of after-tax contributions is that they can be converted to Roth funds to take advantage of the tax-free benefits associated with Roth accounts.        

Defined Contribution Plan Limits

After-tax contributions are relevant because the IRS contribution rules limit how much a person can save in retirement plans.  

The IRC Section 402(g) restricts the maximum amount of elective deferrals a plan participant can make each calendar year.  Elective deferrals can be in the form of pre-tax or designated after-tax (Roth) contributions.  The current 402(g) limit for 2021 is $19,500 ($26,000 catch-up) per individual.  This means if an individual participates in one or multiple retirement plans, the total amount of elective deferrals across all retirement plans is limited to only $19,500 ($26,000 catch-up). 

The IRS also enforces the 415 Limit.  The 415 Limit for Defined Contribution Plans puts a ceiling on the total amount an individual can both contribute and receive in a plan on an annual basis.  Plan participants can receive retirement plan contributions from their employer in the form of safe harbor, matching or profit-sharing contributions.  The current Defined Contribution Plan 415 Limit for 2021 is $58,000 ($64,500 catch-up).

Unfortunately, due to several factors (discrimination testing, safe harbor restrictions, corporate profitability, plan limitations, etc.) most participants never reach the annual 415 Limit. 

After-tax contributions are a potential solution for plan participants to reach the 415 savings limit. 

After-Tax Contributions

As mentioned earlier, after-tax contributions should be considered after a participant has met the elective deferral maximum.    Although a participant may be limited by the 402(g) elective deferral limit, they may be eligible to make additional after-tax contributions into their retirement plan.  For example, a 45-year-old participant contributing the maximum 402(g) limit of $19,500 and receiving an employer match of $10,000 could potentially save up to an additional $28,500 in after-tax contributions. 

Example.  After-Tax Contributions for 45-year-old Participant

Employee Elective Deferral


Employer Match



DC Plan Contributions


415 Limit


DC Plan Contributions



Available After-Tax Contributions


The unique feature of the after-tax contributions is that they are eligible to be converted to a Roth account.  This allows the participant to take advantage of the tax-free benefits associated with a Roth such as: tax-free growth, tax-free distributions, no required minimum distributions, and tax-free transfer to beneficiaries.

Given Roth IRA contribution and eligible income limits, this is a great option to potentially super-size a Roth account with substantial contributions. 

Execution and Potential Pitfalls

This whole strategy sounds great but there are a few caveats to making this strategy work.  First, the plan document needs to permit after-tax contributions.  Second, the after-tax contributions are subject to discrimination testing which may limit how much a person can contribute.  Third and most important, the plan needs to allow for in-service rollovers to avoid pro rata (pre-tax versus after-tax) distribution rules and limit income tax liabilities. 

Immediately rolling over the funds prevents several potential tax concerns and simplifies the rollover process.  The IRS does not permit an individual to partially rollover only the after-tax contributions.  A partial rollover must include the proportionate amount of funds in the account that are pre-tax and after-tax.  On the other hand, if the distribution is processed as a full rollover, the pre-tax funds could be rolled over to a Traditional IRA and the after-tax contributions to a Roth IRA. [1]

Additionally, the IRS considers earnings on the after-tax contributions to be pre-tax amounts.  The earnings on after-tax contributions are eligible to be rolled over to a Traditional IRA.  A participant can rollover the after-tax contributions to a Roth and the earnings to a Traditional IRA.[2]  Although, maintaining accurate records to track both contributions and earnings is an arduous task that requires good recordkeeping services.  The advantage of immediately rolling over the funds after they are contributed is that it simplifies the recordkeeping process and allows the participant to accumulate earnings tax-free in a Roth versus pre-tax.

This strategy is ideal for small business owners and Solo 401(k) participants since they may have more flexibility with discrimination testing and plan document rules.  Working closely with a good Third-Party Administrator (TPA) that can navigate through the confines of the plan document and discrimination testing guidelines to execute this strategy is critical. ]

Tax Implications and Back Door Roth Alternative

This approach allows a participant to take advantage of the many tax-benefits associated with Roth accounts.  Roth accounts have many tax-advantages in the form of tax-free growth, tax-free retirement income, and tax-free bequeath to beneficiaries. 

If the current administration raises long-term capital gains taxes and eliminates the step-up in basis for select income groups, a Roth account could be a great option to limit these taxes.

Furthermore, this is a great alternative to a Back Door Roth because it avoids potential issues pertaining to IRS pro rata rules related to the conversion and provides for potentially higher contribution amounts.  

Final Comments

Implementing after-tax contributions within a Defined Contribution Plan requires careful coordination between the participant, financial advisor, and third-party administrator.  Since after-tax contributions are subject to additional testing rules, the strategy is ideal for small business owners or Solo 401(k) participants looking to find additional ways to save for retirement or super-size a Roth account.

If you are interested in learning more about this strategy, please give our team a call.



This information is not intended as authoritative guidance or tax or legal advice.  You should consult your attorney or tax advisor for guidance on your specific situation.  In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

A Roth IRA offers ax deferral on any earnings in the account.  Qualified withdrawals of earnings from account are tax-free.  Withdrawals of earnings prior to 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.  Limitations and restrictions may apply.

[1] Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans.

[2] Internal Revenue Service. Rollovers of After-Tax Contributions in Retirement Plans.