In the United States, having a sound financial mindset is essential. Common methods of financial management include 401(k), Roth IRA, stocks, various types of insurance, and real estate. However, there are many financial management methods that are often overlooked or less discussed. In this series, I will sequentially introduce four types of investment account channels, with this article being the second installment.
Employer retirement plans typically only cover pre-tax 401(k) or Roth 401(k), but some employers allow for after-tax contributions, which can then be converted through in-plan Roth conversion or utilized for a “Mega Backdoor Roth.” While not every company offers these options, they can be powerful asset accumulation pathways for individuals with moderate to high incomes.
To begin, let’s clarify some terms. “401(k)” and “403(b)” are two different types of employer-sponsored retirement plans. 401(k) is commonly found in private enterprises, including many companies and the tech industry, while 403(b) is prevalent in public schools, certain non-profit organizations, and some religious institutions.
Both plans share similar tax structures, potentially offering traditional pre-tax contributions, Roth contributions, and in some cases, “non-Roth after-tax contributions.”
What are after-tax contributions? Within a 401(k) or 403(b), after-tax contributions are a type of employee-sourced funding that serves one primary purpose: allowing individuals to contribute more of their income to their employer’s retirement plan and swiftly convert it to Roth (Mega Backdoor Roth) if the plan permits, transforming subsequent growth into tax-free returns.
Regular employee contributions (Traditional 401(k) + Roth 401(k) combined) are subject to annual limits (set at $23,500 in 2025). If you have reached this limit but your company plan allows for after-tax contributions, you can use them to reach the higher annual total limit of $70,000, which includes employer match/bonus and after-tax contributions.
Therefore, the primary function of after-tax contributions is to expand the investable amount from the initial cap of $23,500 to a potential maximum of “$70,000 minus any previously deposited amounts and employer contributions.” The key value lies in converting the “extra funds” into Roth (Mega Backdoor Roth).
However, it’s essential to note that after-tax contributions themselves are not Roth funds. If not handled appropriately, there is a significant drawback: while the principal amount (your after-tax contributions) will not be taxed again in the future, any earnings (investment growth within the account) upon withdrawal would typically be subject to ordinary income tax, unlike Roth accounts, which are tax-free.
In practice, the value of after-tax contributions typically hinges on whether the plan allows for one or both of the following options: in-plan Roth conversion, transferring after-tax funds to a Roth bucket within the same 401(k) or 403(b), or in-service distribution, moving after-tax contributions out to a Roth IRA while still employed. This entire procedure is commonly referred to as Mega Backdoor Roth.
In essence, Mega Backdoor Roth involves utilizing after-tax contributions and subsequently converting the funds into a Roth account through either “in-plan Roth conversion” or “rollover to a Roth IRA,” enabling tax-free growth in the long term.
Do your after-tax contributions have utility? Whether your employer offers a 401(k) or 403(b) (some individuals may have both, though typically due to employer design intricacies), the feasibility of executing a Mega Backdoor Roth rests on two critical factors: whether your plan permits after-tax contributions and allows for conversion to Roth.
If your plan meets these criteria, promptly converting after-tax funds into Roth—either in lump sums or periodically—will ensure that most of the earnings accrue within the Roth account (possibly providing tax-free qualified withdrawals in the future).
Annual limits and total amounts (employee + employer) will be adjusted annually; for instance, the IRS has already announced adjustments for the 2026 401(k) employee limits and other thresholds.
According to the IRS announcement, in 2026, the general employee contribution limit (402(g), total of Traditional + Roth 401(k) or 403(b)) will be $24,500 (increased from $23,500 in 2025). Those aged 50 and above can make an additional catch-up contribution of $8,000, while individuals aged between 60 and 63 can take advantage of the “super catch-up” provision, contributing $11,250. Moreover, the total annual additions cap for 2026 under 415(c) will be $72,000.
Therefore, supposing you are 61 years old and your retirement plan allows for After-tax to Roth conversions in 2026, the theoretical maximum amount you can contribute to the plan would be $72,000 plus $11,250, totaling $83,250. Deducting any employer match or bonus portions will give you an idea of “how much you can realistically contribute.”
Disclaimer: This article is for informational purposes regarding investment and financial management. Readers are advised to independently evaluate their investment decisions as individual circumstances vary. If you have investment needs, please make informed judgments and consult with professionals. Remember, all investments carry risks, and the publisher of this article cannot be held liable for any related losses.