Difference between Roth 401k and After-tax 401k

In this post you will learn :

  • Why invest in Roth401k vs traditional401k
  • Difference between Roth401k and aftertax 401k
  • Is the after401k for you

For the last few years, I have been contributing to my Roth-401k instead of my traditional 401k. It ends up the same, except for the fact that Roth-401k allows you to save more since the limit is the same for Roth401k and traditional 401k.

Now my employer allows me to contribute to an after-tax 401k. Let's see the difference between the Roth 401k and Aftertax 401k.

Roth 401k:

  • Contribution limit is 18000$ (2016) [1].
  • Withdrawal for contribution and earnings not taxed (assuming it's a qualified distribution).

After-tax 401k

  • Contribution limit is 53000$ and includes:
    • 401k (roth or traditional) + employer match + aftertax 401k. [1]
  • Withdrawal for contributions not taxed
  • Withdrawal for earnings are taxed. This is the most important distinction.

Both Roth-401k and After-tax 401k must follow the 401k distribution rules:

  • Done after age 59 ½ without penalty
  • Money held for 5 years in account
  • Need minimum required distributions

What to do with an after-tax 401k:

The trick here is to rollover your aftertax 401k contribution to a Roth IRA plans. This way you can have earning withdrawal without any taxes.[2] Roth IRA also doesn't have the minimum required distribution.