“Mega Backdoor” After-Tax 401(k): What Is it and How It Works

(It’s not “just” the Roth option!)

My daughter running in the fall leaves

We’ve all heard how you can contribute up to $23,000 to your 401(k) this year (2024) via your paycheck on a pre-tax or Roth basis. (I wrote all about this in my last post here.)
BUT! What is often overlooked and much less talked about is the “after-tax 401(k)”. 

Now high-level, this "after-tax" 401(k) is a way to supercharge your 401(k) 🙂 

The “umbrella” limit for 401(k) contributions is actually $69,000 (using 2024 numbers); this is called the 415 limit.

The “umbrella” limit for 401(k) contributions is actually $69,000 (using 2024 numbers); this is called the 415 limit. But practically because you can only defer up to $23,000 of your salary into your 401(k), most people don’t come close to reaching this limit. 

Fun fact: When your employer matches your contribution or makes their own contribution to your 401(k), their contributions only count towards this umbrella limit but not the lower salary deferral limit.

IF (and it’s a big if) your employer offers this third contribution option, contributing to your 401(k) on this “after-tax” (NOT Roth) basis is a way to contribute up to the full $69,000. While most employers don’t actually offer this option (and therefore this whole article is a moot point for you), many larger employers do. And if your employer does offer this, that’s amazing - you should consider taking advantage of how you can contribute up to $46,000 more dollars ($69,000 - $23,000, not including any employer contributions) to this account. 

Essentially, you will see three contribution options in your 401(k) portal: pre-tax, Roth, and after-tax. That’s one good way to tell if your employer offers this benefit without reading the 401(k) Summary Plan Description, which will also tell you.

Ok you’ve checked and your employer offers this capability. Awesome. Do they also offer what’s called an “in-plan Roth conversion”?

This extra step is needed to best take advantage and optimize these contributions. Because while your actual after-tax contributions are treated as “Roth” inside the plan, the earnings that these after-tax contributions generate will be treated as “pre-tax” unless and until you roll over the after-tax contributions to a Roth IRA.

Part of this strategy is to roll over the after-tax contributions as soon as you can within reason so that most of their associated earnings become “Roth”-style, saving you future taxes. “In-plan Roth conversions” allow you to periodically do this every year, even though you normally cannot otherwise roll 401(k) money over if/until you leave your employer.

Because of this extra step, you typically want to fill up either/or/both of the pre-tax and Roth salary deferral options first to reach the $23,000 “sub-limit”, depending on your tax bracket. (Check out my last post where I dive into how you should decide which style to contribute.)

Note: This is terminology that even employers get confused about! I have seen these terms get mixed up even in their employee benefits booklets for my clients so please do beware here.

Should you take advantage of this after-tax 401(k)?

It all depends on your goals, cash flow, and overall life status! Of course, many do not have the extra cash flow to support putting away up to $69,000 into their 401(k)! And that is totally ok.

Personal finance (and life in general) is a constant balancing act of Now You and Future You, and this choice is no exception. What kind of goals (if any) do you have coming up? How much money are you willing to put away for the long-term to get this extra tax benefit? There’s no one right answer, and your answer could very well be different from your friends’ answer next to you. 

But now you have the information to make an informed decision! You’ve got this. 

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