After-Tax 401(k): The Key to Enhancing Tax-Free Savings

By: Charlotte Huger, CFP®

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If you’re the type of person who maxes out all of your retirement benefits, saves into a brokerage account and maybe even puts extra money towards your mortgage, this is the article for you! I want to talk about a game-changing retirement tool: the non-Roth after-tax 401(k). This isn't just about stashing a little extra cash; it's about unlocking a tax-advantaged nest egg. Think of it as a VIP section for your retirement savings, but you'll need to check if your employer offers it first!

The Low Down

Here's the deal: In 2025, the standard employee contribution limit for a 401(k) is $23,500. If you're 50-59 or 64+ years old, you can tack on an extra $7,500 in catchup contributions, for a total of $31,000. From the ages of 60-63 the catch-up contributions are $11,250.

But what if you still have more to save?

That’s where the magic happens. The total annual limit for a 401(k) on all contributions—yours, your employer’s match, and any after-tax contributions—is a whopping $70,000 (or $77,500 if you’re 50-59 or 64+)! So, once you've hit your $23,500 personal limit (or $31,000 if you're 50-59 or 64+), you can start stuffing those after-tax dollars into your 401(k) up to that $70,000 cap (or $77,500 if you’re 50-59 or 64+). If you are age 60-63, the limits are $34,750 and $81,250, respectively.

Why is this so powerful? Two reasons.

First, it allows you to max out your pre-tax contributions (as opposed to using Roth) to lower your taxes by as much as possible today.

Second, we have to consider the long-term impact. Let's run the numbers. Imagine you contribute an extra $10,000 a year into your non-Roth after-tax 401(k) and immediately convert it. If you do this for two decades and earn an average annual return of 8%, that extra savings alone would grow to an incredible $494,229! That entire half-million dollars is now in a Roth account, which means every single penny is tax-free in retirement (if requirements are met). Now whether you should save $10K, more, or less, that’s a question for your financial advisor. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Added Benefits

But wait, there’s more! One of the most powerful and often overlooked benefits of a Roth account, whether a Roth IRA or a Roth 401(k), is the absence of Required Minimum Distributions (RMDs) for the original account owner (for now). Unlike traditional retirement accounts where the IRS forces you to start taking taxable withdrawals at age 73, or 75 for many of you reading this, you can let your Roth money continue to grow completely tax-free for your entire lifetime.

This is a huge advantage, especially if you believe tax rates might be higher in the future (which I do…).

Best of all, the benefits continue for your kids! Since the money can grow tax-free indefinitely, it can be passed on to your beneficiaries who, while they will have to deplete the account within 10 years under current law, will also receive those distributions completely free from income taxes (if conditions are met).

Once again let’s look at the numbers… if you left your kids $2M in a traditional IRA, they’d have to take out at least $200K/year (assuming no growth)! Assuming a 30% effective tax and no growth, your kids just lost $600K to Uncle Sam over those 10 years!

But what happens with a Roth account? Your kids get every last penny (if conditions are met). Saving over half a million in taxes sounds good to me!

Conclusion

This "mega backdoor Roth" strategy is an incredible opportunity for high-income earners who are locked out of contributing to a Roth IRA directly. It's a way to enhance your retirement savings, giving you a bucket of tax-free money that potentially can grow for years. But remember, this isn't an automatic feature. You need to make sure your employer's plan allows for both the after-tax contributions and the in-plan Roth conversions. So, before you get too excited, call up your HR department and ask them about this awesome financial hack and after that, sit down with your CFP and create a gameplan!

A Roth IRA and Roth 401k offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 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.

A Roth IRA conversion—sometimes called a backdoor Roth strategy—is a way to contribute to a Roth IRA when income exceeds standard limits. The converted amount is treated as taxable income and may affect your tax bracket. Federal, state, and local taxes may apply. If you’re required to take a minimum distribution in the year of conversion, it must be completed before converting.

Each conversion may have its own five-year period, and early withdrawals may be subject to a 10% penalty unless an exception applies. Income limits still apply for future direct Roth IRA contributions.

his information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Securities and investment advisory services offered through LPL Enterprise (LPLE), a Registered Investment Advisor, Member FINRA/SIPC, and an affiliate of LPL Financial. LPLE and LPL Financial are not affiliated with Pillar Wealth Partners