# After-Tax Contribution: Definition, Rules, and Limits

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## What Is an After-Tax Contribution?

An after-tax contribution is money paid into a retirement or investment account after income taxes on those earnings have already been deducted. When opening a [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) retirement account, an individual may choose to defer the income taxes owed until after retiring, if it is a traditional retirement account, or pay the income taxes in the year in which the payment is made, if it is a Roth retirement account.

Some savers, mostly those with higher incomes, may contribute after-tax income to a traditional account in addition to the maximum allowable pre-tax amount. They don't get any immediate tax benefit. This commingling of pre-tax and post-tax money takes [some careful accounting](https://www.investopedia.com/articles/retirement/05/aftertaxassets.asp) for tax purposes.

### Key Takeaways

*   There are pre-tax and after-tax contributions to retirement accounts.
*   Traditional accounts consist of pre-tax contributions, and Roth accounts consist of after-tax contributions.
*   If you think you will have a lower income during retirement, a traditional account may make sense. If you think you will have a higher income during retirement, a Roth may make sense.
*   You can only contribute a certain amount to tax-advantaged retirement plans each year. This amount is raised annually to keep up with inflation.
*   If you are over age 50, you can make an additional catch-up contribution to your retirement plans.  
    

## Understanding After-Tax Contributions

In order to encourage Americans to save toward their retirement years, the government offers several tax-advantaged retirement plans such as the [401(k) plan](https://www.investopedia.com/terms/1/401kplan.asp), offered by many companies to their employees, and the [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp), which anyone with earned income can open through a bank or a brokerage.

Most, but not all, people who open a retirement account can choose either of the two main options:

*   The traditional retirement account allows its owner to put [pre-tax](https://www.investopedia.com/terms/p/pretaxcontribution.asp) money in an investment account. That is, the money is not subject to income tax in the year it is paid in. The saver's gross taxable income for that year is reduced by the amount of the contribution. The IRS will get its due when the account holder withdraws the money, typically after retiring.
*   The [Roth account is the after-tax option](https://www.investopedia.com/pre-tax-and-roth-contributions-5219963). It allows the saver to pay in money after it is taxed. That is more of a hit to the person's immediate take-home income. But after retirement, no further taxes are owed on the entire balance in the account, as long as it's been five years since the first contribution was made to the account. There are [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp)s, Roth [457(b)s](https://www.investopedia.com/terms/1/457plan.asp), and Roth [403(b)s](https://www.investopedia.com/terms/1/403bplan.asp). The Roth 401(k) option (referred to as a [designated Roth](https://www.investopedia.com/terms/d/designated-roth-account.asp) option) is newer, and not all companies offer them to their employees. Earners above a set limit are not eligible to contribute to a Roth IRA account.

### Post-Tax or Pre-Tax?

The post-tax Roth option offers the attraction of a retirement nest egg that is not subject to further taxes. It makes the most sense for those who believe they may be paying a higher tax rate in the future, either because of their expected retirement income or because they think taxes will go up.

In addition, money contributed post-tax can be withdrawn at any time without penalty. (The same is not true for the profits in the account, however; account-holders must wait until they are 59½ to withdraw profits without penalty.)

On the downside, the post-tax option means a smaller paycheck with every contribution into the account.

The pre-tax or traditional option reduces the saver's taxes owed for the [year the contributions are made](https://www.investopedia.com/can-you-fund-a-roth-ira-after-filing-taxes-4770667), and it is a smaller hit to current income. With a traditional account that is funded with pre-tax contributions, withdrawals are considered taxable income, whether it's money that was paid in or profits from the money earned.

### Contribution Limits

Both post-tax and pre-tax retirement accounts have limits on how much can be contributed each year:

*   The IRS sets the maximum contribution limits for Roth and traditional IRAs each year. These limits are raised each year to keep up with inflation. Taxpayers age 50 and above can make an additional catch-up contribution.
*   The annual contribution limit for both Roth and traditional 401(k) plans is higher than it is for Roth or traditional IRAs. The catch-up contribution limits are also higher.

> **Important**
>
> If you have a pre-tax or traditional account, you will have to pay taxes on money withdrawn before age 59½. The funds are also subject to a 10% early withdrawal penalty.

## Special Considerations

Withdrawals of after-tax contributions to a traditional IRA should not be taxed. However, the only way to make sure this doesn't happen is to file IRS [Form 8606](https://www.irs.gov/pub/irs-pdf/f8606.pdf). Form 8606 must be filed for every year you make after-tax contributions to a traditional IRA and for every subsequent year until you have used up all of your after-tax balance.

Since the funds in the account are separated into taxable and non-taxable components, figuring the tax due on the [required distributions](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) is more complicated than if the account holder had made only pre-tax contributions.

## What Are the IRA Limits?

The IRA contribution limit is adjusted each year to keep up with inflation. If you are over age 50, you can make an additional catch-up contribution.

## Can I Contribute to Both a Traditional IRA and a Roth IRA?

Yes, you can contribute to both a traditional IRA and a Roth IRA. There are no restrictions on contributing to both; however, the total amount you contribute to both cannot be over the overall limit for IRAs set by the IRS.

## Is It Better to Do Pre-Tax or After-Tax Contributions?

Whether it's better to contribute on a pre-tax or after-tax basis will depend on your financial circumstances. The rule of thumb is that pre-tax contributions are better for higher-earners while after-tax contributions are better for lower-earners, particularly those who expect to be in a higher tax bracket when they retire.

## The Bottom Line

After-tax contributions into retirement accounts can be beneficial if you expect to be in a higher income-tax bracket when you are retired. This may not always be the case, and everyone's situation is different. Generally, it's good to have a mix of retirement accounts that allow for tax advantages in the present and when you are retired.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Rollovers of After-Tax Contributions in Retirement Plans](https://www.irs.gov/retirement-plans/rollovers-of-after-tax-contributions-in-retirement-plans)."
>     
> 2.  Internal Revenue Service. "[Retirement Plans](https://www.irs.gov/retirement-plans)."
>     
> 3.  Internal Revenue Service. "[Publication 590-B, Distributions From Individual Retirement Arrangements](https://www.irs.gov/publications/p590b#en_US_2020_publink1000230899)."
>     
> 4.  Internal Revenue Service. "[IRA FAQs - Distributions (Withdrawals)](https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals)."
>     
> 5.  Internal Revenue Service. "[About Form 8606, Nondeductible IRAs](https://www.irs.gov/forms-pubs/about-form-8606)."