After-Tax Contributions - 401(k) Retirement Glossary & Terminologies

In after tax contributions, income tax is deducted from your total income and you make 401(k) contributions after having paid taxes. The advantage to doing so is that you have already taken care of taxes now, when you withdraw the retirement funds when you become 65 years of age, you will not have to pay taxes on it then. For traditional IRAs, these are known as non-deductible contributions and for qualified 401(k) plans, these are known as after-tax contributions. Another advantage of making after-tax contributions is that distributions of after-tax contributions are not subject to income tax or early distribution penalties.

It is advised that in any year an investor makes non-deductible contributions or does a rollover of after-tax contributions, then he should file IRS Form 8606 also helps keep track of your total after-tax contributions so that once you have paid taxes on these, you never pay taxes on them again, and it is better to know of the after-tax amounts rather than guessing.