Roth 401k vs Post Tax 401k Explained

Roth 401k contributions are made with after-tax dollars, meaning you've already paid income tax on the money. This sets it apart from traditional 401k plans, which allow pre-tax contributions.

The main difference between a Roth 401k and a post-tax 401k is the tax treatment of the contributions. With a Roth 401k, you pay taxes upfront, while a post-tax 401k is not a real type of account, but rather a misnomer for a traditional 401k.

In a Roth 401k, the money grows tax-free and withdrawals are tax-free in retirement, provided certain conditions are met.

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A Roth 401(k) is funded with after-tax dollars, meaning you've already paid income tax on the money you contribute. This is in contrast to a traditional 401(k), where contributions are made before taxes.

One key difference between a Roth 401(k) and a post-tax 401(k) is that the former allows tax-free growth and withdrawals, while the latter does not. Post-tax 401(k) contributions are made with money that's already been taxed.

With a Roth 401(k), you pay taxes now and potentially avoid them in retirement. In contrast, a post-tax 401(k) doesn't offer this tax-free benefit.

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In 2024, the contribution limit for a Roth 401(k) is $23,000, plus a $7,500 catch-up limit for individuals aged 50 and older.

You can contribute up to $69,000 to a 401(k) plan in 2024, including after-tax contributions, as long as total contributions don't exceed this limit.

Roth 401(k) contributions are subject to the usual 401(k) contribution limits, but after-tax 401(k) contributions are not considered deferrals and are not subject to these limits.

The IRS may adjust the contribution limits annually for inflation, so keep an eye on those numbers if you're planning to max out your contributions.

After-tax 401(k) contributions can be higher as long as total 401(k) contributions don't exceed the limit, which is $69,000 in 2024, or $76,500 if you're 50 or older and making catch-up contributions.

There's no maximum income limit for Roth 401(k) contributions, unlike Roth IRAs, which have income restrictions.

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In general, Roth 401(k) contributions are made after taxes, which means they don't reduce your current taxable income. This is a key difference between Roth and traditional 401(k) plans.

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The contribution limits for Roth 401(k) are the same as traditional 401(k) plans, with a limit of $23,500 ($31,000 if "catch-up" eligible) for 2025.

When it comes to tax treatment at distribution, Roth 401(k) contributions are tax-free, but only if you meet certain conditions. You'll need to wait at least five years after your first Roth deferrals are contributed and meet other requirements for a "qualified distribution."

Here's a comparison of traditional and Roth 401(k) plans in a side-by-side format:

Participants can roll over their Roth 401(k) contributions to other retirement plans or IRAs, but there are some rules to keep in mind.

Roth 401(k) accounts can be rolled directly into other designated Roth accounts, including those established in a Roth 401(k), a Roth 403(b), a Roth 457(b), or a Roth IRA.

This can have an impact on the 5-year holding period, so it's essential to understand the rules and plan accordingly.

Roth 401(k) contributions can be rolled over to other retirement plans or IRAs, providing flexibility and options for your financial future.

Indirect rollovers of Roth 401(k) contributions are problematic and should be avoided, as they can lead to complications and penalties.

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When comparing Roth and traditional 401(k) plans, one key difference is the tax treatment at contribution. Contributions to a traditional 401(k) plan are made pre-tax, reducing your current taxable income.

A Roth 401(k) plan, on the other hand, has contributions made after taxes, with no effect on your current taxable income.

Contribution limits for both plans are subject to the same IRC section 402(g) annual limit, which is $23,500 for 2025, or $31,000 if you're "catch-up" eligible.

A traditional 401(k) plan's tax treatment at distribution is the opposite of its contribution treatment: both the contribution principal and earnings are subject to Federal and most State income taxes when distributed.

In contrast, a Roth 401(k) plan's contribution principal is tax-free when distributed, and earnings are also tax-free if part of a "qualified distribution".

A qualified distribution is made at least five years after the first Roth deferrals are contributed and after one of the following events occurs: death, disability, or a first-time home purchase.

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Here's a side-by-side comparison of the two plans:

As you can see, the tax treatment at contribution and distribution are the main differences between Roth and traditional 401(k) plans.

Retirement planning is crucial for a secure financial future. You can start by understanding the types of retirement plans available, such as 401(k) plans. Employers sponsoring 401(k) plans may allow participants to make Roth 401(k) contributions on an after-tax basis.

A Roth 401(k) allows you to contribute after-tax dollars to your retirement plan account. Earnings on these contributions grow tax-free, meaning you won't pay income tax on distributions from the Roth 401(k) contribution source. This can be a great option for highly compensated participants who can't make Roth IRA contributions due to income limits.

There are no maximum income limits for Roth 401(k) contributions, a perk not found in Roth IRAs. This means you can contribute to a Roth 401(k) even if your income is higher than the established maximum for Roth IRAs.

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Contributions to a post-tax 401(k) are made with money that's already been taxed.

This means you've already paid income tax on the money you put into your 401(k), so you won't get a tax deduction for your contributions.

The money in your post-tax 401(k) grows tax-free, meaning you won't pay taxes on the investment earnings until you withdraw the funds in retirement.

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An After-Tax 401(k) isn't the same as a Roth 401(k). They have different tax treatments at withdrawal.

Contributions to an After-Tax 401(k) are made with after-tax dollars, which means they've already been taxed. Contributions to a Roth 401(k) are made with pre-tax dollars, which means they haven't been taxed yet.

While both types of contributions are tax-free at withdrawal, earnings generated on After-Tax contributions are taxed as ordinary income at the time of distribution.

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Can participants borrow from their after-tax contributions? Yes, plan sponsors may decide to permit participant loans from Roth 401(k) contribution sources.

Plan sponsors have the flexibility to allow participant loans from after-tax Roth contributions, but it may impact their administrative processes. This means that the rules and procedures for taking out loans from the plan could be affected.

If a plan sponsor chooses to allow loans from after-tax Roth contributions, participants can take advantage of this option. However, it's essential to note that plan loans are subject to certain legal requirements and the plan sponsor's administrative policies.

Plan sponsors must carefully consider their administrative processes when deciding whether to allow loans from after-tax Roth contributions. This ensures that the plan operates smoothly and in compliance with relevant laws and regulations.