If you have changed employers over the course of your career, you probably know not all 401(k) plans are created equal. They contain different fees, investment options, contribution limits, etc.
Contribution limits? A contribution limit is the maximum amount of money that an individual can contribute to a retirement account within a certain time, typically a year. Contribution limits are set by the federal government and usually change annually to account for inflation.
In 2025, 401(k) plans allow participants to contribute up to $23,500 from their earnings as either pre-tax or Roth (with additional catch-up contributions if you are age 50 and above). However, more than $23,500 plus the catch up can be contributed to your 401K per year. The total limit for 401(k) contributions is $70,000 (plus catch-up contributions, if applicable). The difference between the $70,000 and the $23,500 can either be made up of employer contributions, which are generally pre-tax, and/or after-tax contributions from eligible employees. Note: not all plans allow for what are known as after-tax contributions.
While neither type of contribution allows for a tax deduction, after-tax contributions and Roth contributions differ slightly and in an important way. Roth contributions and their compound returns grow tax-free over your lifetime. In contrast, growth on after-tax contributions is tax deferred until withdrawn and not tax-free. Tax-free growth is a big advantage to Roth 401K contributions, but they are subject to the $23,500 limit. Still, many taxpayers are better off contributing pre-tax to a traditional 401K.
To illustrate, let’s say you contribute $100 in after-tax 401(k) contributions and the balance grows to $110. When you distribute those funds from the 401(k), you will owe ordinary income tax on the $10 gain. Conversely, if you contribute $100 to a Roth 401K and that balance grows to $110, you will not pay income tax on the $10 gain.
Where the after-tax contributions really shine is when a 401(k) plan includes what is known as a daily in-plan Roth conversion. This feature automatically converts any after-tax contributions to Roth contributions, so the funds are converted to Roth before the assets have any taxable growth. Assuming there are no employer contributions, a participant could contribute $46,500 ($70,000 – $23,500 pre-tax deferral) annually after-tax and have it and future earnings accrue tax-free for life.
This strategy is colloquially known as the “Mega Backdoor Roth” and while it is still not the norm for a 401(k) to offer these capabilities, they are growing in popularity, especially in companies with several highly compensated employees. There are a lot of moving parts to this strategy, so we recommend consulting with your Modera advisor to see if you can utilize this approach in your financial plan.
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