Understanding Contributions: Pre-Tax, Roth and After-Tax

• Pre-tax contributions, as the name implies, mean they are made before paying taxes on the income. They reduce the participants’ current adjusted gross income which could possibly bump them into a lower tax bracket today. 
• Distributions during retirement are taxed as ordinary income.
• Plan participants who may benefit are those that would rather pay taxes on the income later, during retirement.

• Roth contributions are made after paying taxes on the income. Participants pay taxes on the income today. However, a Roth withdrawal will be tax-free only if the withdrawal is made 5 year or more after January 1 of the calendar year in which the first Roth contribution or Roth conversion was made and the withdrawal was made due to death, disability or reaching the age of 59 ½.
• Plan participants who may benefit are those that would rather pay taxes on the income today because they expect their tax rate to be higher in the future. Also, if a participant is planning on having other taxable income sources in retirement, a Roth account may help reduce taxes paid in retirement.

• If allowed as a provision by the plan document, employees can elect to make an after-tax payment to a traditional or Roth 401(k) account above the $23,500 limit. The IRS sets a total combined limit of $70,000 in 2025, inclusive of employee and employer contributions.¹
• After-tax 401(k) contributions are less commonly offered by employers. The rules and availability vary from plan to plan.
• The earnings on after-tax contributions are taxed as ordinary income when making qualified withdrawals.
• Some plans allow you to convert pre-tax and/or after-tax dollars to a Roth account either through an in-plan Roth or a mega backdoor Roth conversion.
• Plan participants who may benefit:
  • High-income earners seeking to maximize retirement contributions.

• An in-plan Roth conversion allows plan participants to convert traditional 401(k) assets to Roth 401(k) assets.
• Basic requirements:
  • The Roth feature is required to allow for in-plan Roth conversions.
  • Employees can convert all or some of their pre-tax contributions.
  • Employees are required to pay income tax on the converted amount at the time of conversion.
  • Employees must wait 5 years after each conversion and reach age 59 ½ to have penalty-free access to the money.
  • Once converted, the contributions cannot be converted back.

• A Mega Backdoor Roth conversion is a special type of 401(k) rollover strategy used most often by highly compensated employees to contribute additional funds to a Roth 401(k). This strategy only works under very specific circumstances for individuals that have extra money to put into a retirement account.
• Generally, to take advantage of this strategy, an employee must be enrolled in an employer-sponsored traditional 401(k) plan that offers after-tax contributions, as well as in-plan Roth conversions or in-service withdrawals of after-tax contributions. Both components are necessary to fully take advantage of this strategy because the process involves the participant making after-tax contributions then immediately taking an in-service withdrawal before the contributions generate any returns that would be taxable in a rollover.
• This strategy only makes sense if the participant has already maxed out their 401(k) and IRA contributions for the year, and they still have extra money they would like to put into a Roth account.
• Plan participants who may benefit:
  • Employees are ineligible to contribute directly to a Roth IRA because their income is too high.²

At PNC Institutional Asset Management^® (IAM), we help plan sponsors understand and meet their fiduciary obligations. We serve as a retirement plan advisor to companies and offer financial education to their employees. Our team would love to provide a free review of your retirement plan and share the latest research on building effective employee financial education campaigns.