An after-tax contribution is money added to a retirement or investment account after income taxes have been taken out. When starting a tax-advantaged retirement account, a person can decide to delay paying income taxes until retirement with a traditional account, or pay the taxes in the year they make the contribution with a Roth account.
Some savers, especially those earning more, can add after-tax money to a traditional account along with the maximum pre-tax amount. They won’t receive any immediate tax advantage. Mixing pre-tax and post-tax funds requires careful tracking for tax reasons.
Learn more about After-Tax Contribution
To help Americans save for retirement, the government provides various tax-friendly retirement plans. These include the 401(k) plan, which many employers offer to their workers, and the IRA, which anyone with a job can set up at a bank or brokerage.
Many people who start a retirement account can pick between the two main choices, but not everyone has this option.
- A traditional retirement account lets you deposit money before taxes. This means you don’t pay income tax on that money in the year you contribute. Your taxable income for that year goes down by the amount you put in. The IRS will collect taxes when you take out the money, usually after you retire.
- The Roth account is an “after-tax” choice. It lets people put in money that has already been taxed. This means less money in their paycheck right now. However, when they retire, they won’t have to pay taxes on the total amount in the account. The Roth 401(k), also known as the designated Roth option, is a newer choice and not every company provides it to their workers. People who earn above a certain limit cannot contribute to a Roth IRA account.
Aftertax vs. Pretax
An aftertax contribution is when someone puts money into a retirement account after they have already paid taxes on that income. This is different from pretax and Roth contributions.
When you make an aftertax contribution, you add money to a traditional or Roth retirement account after taxes are taken out. There are no tax benefits right away, but the money you earn on these contributions grows without being taxed until you take it out.
In a traditional retirement savings plan, you can contribute either pretax or aftertax money. Roth accounts also accept aftertax contributions. You can choose to make aftertax contributions instead of or in addition to pretax ones.
This type of contribution is favored by high earners who have fully funded their 401(k) with the maximum allowed pretax or Roth contributions.
For the tax year 2024, the Internal Revenue Service (IRS) states that if you are under 50 years old, you can contribute up to $23,000 to a 401(k). If you are 50 or older, you can add an extra $7,500 as a catch-up contribution. (In tax year 2023, the limit is $22,500 for those under 50, plus an additional $7,500 for those 50 and older.)
There is an annual limit on total contributions from all sources, including employer contributions. For tax year 2024, the limit is $69,000 for individuals under 50, with an extra $7,500 for those aged 50 and above.
Should You Choose Pre-Tax or After-Tax Contributions?
Choosing between pre-tax and after-tax contributions depends on a person’s financial situation. Usually, pre-tax contributions suit higher earners, while after-tax contributions are better for lower earners, especially those who think they will be in a higher tax bracket when they retire.
Conclusion
Putting money into retirement accounts after paying taxes can be helpful if you think you will pay more in taxes when you retire. However, this isn’t true for everyone, and each person’s situation is unique. It’s usually wise to have different types of retirement accounts that offer tax benefits now and in the future.