Understanding the Difference Between Roth and After-Tax Contributions

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If your employer offers Roth elective deferrals through your retirement account, there are potential savings opportunities worth considering. The decision to choose this option over the more traditional pretax approach (or a combination of both) is a personal one — based on your current and future circumstances.

  • How does a Roth Elective Deferral work?
  • Unlike traditional tax-sheltered contributions, Roth 403(b) or 401(k) elective deferrals are a form of after-tax contributions. Money you contribute to your retirement plan as a Roth elective deferral will be subject to federal, state and Social Security tax before it is invested in your retirement account, unlike traditional contributions. The investment then grows tax-sheltered until you take it out at retirement. If it is withdrawn as a qualified distribution, your original contributions and earnings are completely free from federal (and in most cases state) tax at that time.
  • How is this different from after-tax contributions, which have been available in the past?
  • Both Roth elective deferrals and after-tax contributions are similar in tax treatment initially and during the years before retirement. The primary difference involves tax treatment for withdrawals. At retirement, qualified distributions of Roth funds are completely tax-free, whereas withdrawals of after-tax contributions will have taxes due on the earnings.
  • Another difference involves liquidity — after-tax contributions are not subject to the same distribution restrictions as Roth elective deferrals (i.e., Roth elective deferrals are available only at death, disability, separation of service, attainment of age 59 ½ or hardship).
  • How much may I contribute?
  • Review the Contribution Limits to see how much you may contribute this year. Employee contribution limits are subject to:
  • General limit on salary reduction contributions (Section 403(g) Limit1,2,3) and
  • Additional salary reduction contributions1,3 (only applies if you are age 50 or older)


  • Combined, these two limits allow you to include any combination of tax-sheltered and Roth contributions all within your maximum limit for employee contributions.


  • Whatever total amount you set aside as employee contributions (tax-sheltered or Roth) should be considered alongside your after-tax and employer contribution amounts. The basic limit, as mentioned in our outline of Contribution Limits, is the combination of these three amounts.


  • The numerical difference between your basic limit (Section 415 Limit1,2) — maximum of all contributions — and your employee contributions (tax-sheltered and Roth) will be the amount allowed for employer and after-tax contributions.


  • Basic limit = employee contributions (Roth or tax-sheltered) + after-tax contributions + employer contributions during tax year.


  • If you make no employee tax-sheltered or Roth contributions ($0) during the year, theoretically you could max out the basic limit with after-tax contributions and/or employer contributions.
  • How do distributions work?
  • Distributions from a Roth 403(b) or 401(k) are tax-free for federal income tax purposes (state tax rules vary by state) provided they are qualified distributions. To be a qualified distribution, accumulations must be held for a five-year period, and the withdrawal must meet one of the following conditions:
  • Be taken on or after age 59 ½
  • Be taken as a result of permanent disability
  • Be taken as a result of the account holder's death


  • What are the benefits of Roth Elective Deferrals?
  • The main benefit of the Roth 403(b) and 401(k) is tax-related and is ultimately achieved at retirement. With Roth elective deferrals, the money you have accumulated through your retirement plan will not have federal income tax (or state tax in many cases) due at distribution if held for a five-year period and one of the above qualifications is met.
  • Who should consider Roth Elective Deferrals?
  • The decision to make Roth elective deferrals is personal, but in general, people who expect that their future retirement income will place them in a higher income tax bracket may benefit from this type of deferral. On the other hand, if you think your post-retirement tax bracket will be lower than your current tax bracket, you may be better off making tax-sheltered contributions.

Remember that choosing the type of contribution method that is right for you does not have to be an either/or decision — you can use a combination of tax-sheltered and Roth contribution options. For more help deciding which method is best for you, utilize our convenient calculator.

1 The IRS may adjust future limits annually for inflation. Adjustments, if any, will be in $500 increments.

2 The maximum contribution is the lesser of 100% of compensation or this adjusted limit.

3 Includes employee salary reduction contributions and Roth elective deferral contributions.


This should not be considered tax advice. You should consult a tax professional to discuss your unique situation.

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