"After-Tax" and "Roth" Contributions... What's the Difference?

There is a common misconception that “After-Tax” and “Roth” mean the same thing when electing your retirement plan contributions.

Something you should know: they’re not. And choosing one over the other can lead to a sizable tax mistake.

Contributions are the same.

  • After-Tax: You pay taxes on the contributions.

  • Roth: You pay taxes on the contributions.

Distributions are very different.

  • After-Tax: Gains are taxed as ordinary income.

  • Roth: Gains are received tax-free (once qualified).

When do after-tax contributions come into play?

  • When contributing to Non-Deductible Traditional IRAs

  • When making After-Tax contributions to your 401(k) plan.

In both cases, you should only make after-tax contributions to immediately convert them to Roth.

If you haven’t converted your balance in a while, talk to an advisor and/or your CPA before converting to ensure there are no surprises come tax season.

CURO Wealth ManagementComment