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After-Tax Contribution: Definition, Rules, and Limits

Photo: After-Tax Contribution Photo: After-Tax Contribution

What’s an after-tax contributions?

After income taxes, after-tax contributions are made to retirement or investment accounts. A standard retirement plan allows an individual to defer income taxes until after retirement, whereas a Roth account allows an individual to pay taxes in the year of the payment.

Know the difference between pre-tax and post-tax contributions.

The post-tax Roth option gives a tax-free retirement nest fund. It makes the most sense for individuals who plan to pay a higher tax rate in retirement or due to tax increases.

Post-tax contributions can be withdrawn at any time without a large IRS penalty. Account gains are protected until the account holder reaches 59½.

The negative is that every post-tax contribution reduces your paycheck. The classic or pre-tax method cuts the saver’s taxes for the year of contributions and lowers current income.

Unfortunately, withdrawals from this retirement fund are taxable, whether paid in or profits.

Roth IRA and after-tax contributions

Roth IRAs are retirement accounts where gains grow tax-free for at least five years. Roth contributions are not tax-deductible because they are made after tax. In retirement, you can withdraw contributions tax-free.

Both post-tax and pre-tax retirement accounts have annual contribution limits:

The tax year 2022 Roth and traditional IRA contribution limits are $6,000 (rising to $6,500 in 2023). Catch-up contributions of $1,000 are allowed for those 50 and older.

Roth and standard 401(k) contributions are $20,500 for 2022 (rising to $22,500 in 2023) and $6,500 for those 50 and older.
To encourage Americans to prepare for retirement, the government supports tax-advantaged retirement plans like the 401(k) plan, which many employers give to their employees, and the IRA, which any working person can join through a bank or brokerage.

Two basic alternatives are available to most retirement account holders:

  • Traditional retirement accounts allow “pre-tax” investment contributions. Income tax is not due on the money in the year it is paid. Contributions lower the saver’s gross taxable income for the year. Account holders will pay the IRS when they withdraw money, often after retirement.
  • Roth accounts are “after-tax.” After taxes, the saver can pay in money. That reduces the person’s immediate take-home pay. The whole account balance is tax-free after retirement. Not all companies provide Roth 401(k)s (designated Roth options), which are newer. Earners over a certain limit cannot contribute to a Roth IRA.

Some high-income savers can add after-tax income to a conventional account in addition to the maximum pre-tax amount. They receive no immediate tax gain. This mixing of pre-tax and post-tax money requires proper tax accounting.

Tax on Early Withdrawal

Post-tax or Roth account deposits can be withdrawn without penalty, but not profits. Since taxes were paid, the IRS doesn’t care.

Money removed before age 59½ from a pre-tax or conventional account is fully taxable and subject to a significant early withdrawal penalty. Account holders who move employment can roll over their money into a similar account at their new position without paying taxes. The meaningful word “rollover.” It means the money travels from account to account without reaching you. It may be taxable income for that year.

Special Considerations

A saver can only contribute so much to a retirement account each year. (You can have many accounts or post-tax and pre-tax accounts, but the contribution limitations are the same.)

Avoid taxing conventional IRA withdrawals of after-tax contributions. The only way to avoid this is to file IRS Form 8606. After making after-tax (non-deductible) contributions to a traditional IRA, Form 8606 must be filed annually until your after-tax amount is exhausted.

The account’s taxable and non-taxable funds make calculating the tax due on mandatory distributions more problematic than if the account user had made just pre-tax contributions.


  • Roth accounts accept after-tax donations.
  • Most 401(k)s are funded with pre-tax cash from your paycheck.
  • Contributing to a Roth may make sense if you expect a higher retirement income.
  • The 2022 IRA funding maximum for under-50s is $6,000 ($6,500 for 2023).
  • Roth IRA contributions require a certain income.

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