Maximize your 401(k) with after-tax contributions

[UNITED STATES] A lesser-known 401(k) feature could offer a major boost to your retirement savings, according to financial advisors — particularly for those nearing retirement.

Starting in 2025, individuals can contribute up to $23,500 to their 401(k) plans. Those aged 50 and older can make additional “catch-up” contributions of $7,500. But for savers aged 60 to 63, that limit rises even further — to $11,250 — thanks to recent changes under the SECURE Act 2.0.

The expanded catch-up allowance reflects a legislative push to help older Americans increase their retirement savings during the critical final years of their careers, when financial obligations such as healthcare and family support may be at their peak.

In addition to these limits, some workplace retirement plans offer the option to make after-tax contributions — a feature that significantly increases the savings ceiling. For 2025, the total 401(k) contribution limit, which includes employee deferrals, after-tax contributions, employer matches, and other deposits, stands at $70,000.

“If you can afford to do this, it’s an amazing outcome,” said Dan Galli, a certified financial planner and owner of Daniel J. Galli & Associates in Norwell, Massachusetts. He noted that many investors are surprised by the opportunity to contribute and then convert those funds into tax-free retirement income.

However, this strategy isn't widely available. As of 2023, only 22% of workplace retirement plans allowed after-tax 401(k) contributions, according to Vanguard’s How America Saves report. These features are typically found in larger employer-sponsored plans.

Experts attribute the limited adoption to the complexity of administering after-tax contributions and managing subsequent Roth conversions. Smaller companies, in particular, often lack the infrastructure to support these offerings.

Even among plans that do offer after-tax contributions, participation remains low. Only 9% of eligible workers utilized the feature in 2023, a slight decline from 10% in 2022, according to Vanguard.

Financial advisors suggest a lack of awareness may be partly to blame. Many workers don’t fully understand the advantages of after-tax contributions or how they differ from Roth 401(k) options. That’s why advisors stress the importance of workplace education programs to improve financial literacy and empower employees to maximize their retirement benefits.

How to Unlock Tax-Free Growth

Both after-tax and Roth contributions begin with post-tax dollars, but their long-term tax treatment differs. Roth contributions grow tax-free, meaning you won’t owe taxes on qualified withdrawals. In contrast, after-tax contributions grow tax-deferred, with earnings taxed as regular income upon withdrawal.

That’s why advisors recommend converting after-tax contributions to Roth as soon as possible.

“The longer you leave those after-tax dollars in there, the more tax liability there will be,” Galli explained. But the ability to convert — and how often — depends on the specifics of each employer’s plan. Some plans allow automatic conversions, while others require manual requests on a limited basis.

Before exploring after-tax contributions, workers should prioritize maxing out traditional pre-tax or Roth 401(k) contributions to take full advantage of employer matching, said Ashton Lawrence, a CFP at Mariner Wealth Advisors in Greenville, South Carolina.

If cash flow allows, after-tax contributions can come next. “Every dollar needs to find a home,” Lawrence said.

For high-income earners, after-tax 401(k) contributions can be particularly powerful. These savers are often ineligible for direct Roth IRA contributions due to income limits. But through a “mega backdoor Roth” strategy — converting after-tax 401(k) dollars to a Roth IRA or Roth 401(k) — they can effectively sidestep those restrictions and build a large, tax-free retirement nest egg.

Despite these opportunities, only 14% of employees maxed out their 401(k) contributions in 2023. Among those with access to catch-up contributions, just 15% took advantage of the feature.