Roth IRA

  • Noelle Merwin
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After-Tax vs. Roth 401(k) Contributions: Which Strategy Fits You?
After-Tax vs. Roth 401(k) Contributions: Which Strategy Fits You? 266 266 Noelle Merwin

If you participate in a company 401(k) plan, you already know that you can make pre-tax contributions up to the annual elective deferral limit to a traditional, tax-deferred account. If your 401(k) plan offers a Roth option, you can use part or all of your limit to make after-tax contributions to a Roth account instead. But you may have a third option, if your 401(k) plan allows it: Make after-tax contributions to a traditional account.

Traditional vs. Roth deferrals

For 2026, 401(k) elective deferral contributions are generally limited to $24,500. If you’ll be 50 or older at year end, you can make additional elective deferral contributions, called “catch-up” contributions. The 2026 catch-up contribution limit is either $8,000 or $11,250, depending on your age. However, if your 2025 salary exceeded $150,000, any catch-up contributions must be made to a Roth 401(k) account.

When you make pre-tax elective deferrals to a traditional 401(k), the contributions aren’t included in your taxable income for the year, but they’re still subject to Social Security and Medicare taxes (collectively called FICA tax). The account funds can grow on a tax-deferred basis, and you’ll owe income taxes on distributions — both those attributable to contributions and those attributable to growth.

When you make after-tax Roth 401(k) elective deferrals, the contributions don’t reduce your taxable income. So, they’re subject to both income tax and FICA tax. The payoff is that earnings in your Roth 401(k) account are allowed to accumulate income-tax-free and you can take income-tax-free qualified withdrawals from the account once you meet the requirements. (Generally, qualified distributions are those after age 59½ if the account has been open at least five years.)

How after-tax contributions are different

If your 401(k) plan allows non-Roth after-tax contributions, they’re treated as part of your taxable wages. Therefore, these contributions are subject to income tax and FICA tax. You may owe state and local income taxes, too. Because they don’t go into a Roth account, they aren’t eligible for all the tax benefits Roth accounts offer.

So, you might be thinking, “why would I want to make after-tax contributions?” The answer is to get more money into your 401(k) account, where it can accumulate income and gains without being taxed until you start taking withdrawals. These contributions aren’t subject to the annual elective deferral limit. So you can make them after you’ve maxed out that limit, including catch-up contributions, if applicable.

However, there’s still a limit on total additions that can be made each year to your 401(k). Including your elective deferrals (except for any catch-up contributions), your after-tax contributions and any employer contributions, 2026 contributions can’t exceed the lesser of: 1) $72,000 or 2) 100% of your compensation.

Also, after-tax contributions create tax basis in your account, which means that the after-tax amount contributed can eventually be withdrawn tax-free. (But withdrawals attributable to growth on that amount will be taxable, a significant difference from qualified Roth distributions.)

After-tax contributions in action

To illustrate how these contributions work, here’s an example: Let’s say your employer sponsors a 401(k) plan with a 50% company match, your 2026 salary is $150,000 and you’re under age 50. The plan allows employees to make after-tax contributions. You max out your elective deferral limit by contributing $24,500 to your traditional 401(k) account. Your employer makes a matching contribution of $12,250. That means you’re allowed to make up to $35,250 in after-tax contributions ($72,000 – $24,500 – $12,250) this year. You decide to make $10,000 of after-tax contributions.

  • Your $24,500 of elective deferral contributions aren’t included in your taxable wages for federal income tax purposes but they are subject to FICA tax withholding.
  • Your employer’s $12,250 matching contribution is exempt from federal income tax and FICA tax.
  • Your $10,000 after-tax contribution is included in your taxable income and is subject to federal income tax and FICA tax. But it creates $10,000 of tax basis in your 401(k) account, which can be withdrawn tax-free.

Be aware that 401(k) plans are subject to complicated nondiscrimination rules intended to prevent plans from operating in favor of highly compensated employees as opposed to rank-and-file workers. In most cases, nondiscrimination rules won’t impact the ability of an employee to make after-tax contributions, but there may be exceptions.

Beyond elective deferrals

If you’ve been maxing out your elective deferrals, after-tax 401(k) contributions can be a tax-efficient way to add to your retirement nest egg. We can review your situation and help you determine whether you might benefit.

To learn more, contact your Smolin representative.

 

  • Noelle Merwin
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Self-employed? Don’t overlook a Roth IRA
Self-employed? Don’t overlook a Roth IRA 266 266 Noelle Merwin

Some small business owners overlook Roth IRAs because they assume their income is too high for them to qualify to make Roth contributions. Others may think their current tax rate is higher than it will be in retirement, making current tax deductions more valuable than future tax-free distributions. However, if you don’t at least consider contributing to a Roth IRA, you may be missing a potentially valuable tax-saving opportunity.

Rules and restrictions

Roth IRA contributions aren’t deductible, but they’re beneficial because you reap tax savings on the back end. (More on that later.) For 2026, the annual contribution limit is $7,500 (up from $7,000 for 2025). If you’ll be 50 or older by the end of the tax year, you can make an additional $1,100 catch-up contribution. The same limits apply to traditional IRAs, and your Roth IRA limit is reduced by any traditional IRA contributions you make for the year.

But your ability to make Roth IRA contributions is phased out if your modified adjusted gross income (MAGI) exceeds certain levels. For 2026, the phaseout ranges are:

  • $153,000 to $168,000 for single individuals and heads of households, and
  • $242,000 to $252,000 for married couples filing jointly.

If your MAGI falls within the range, your contribution limit is reduced. If it equals or exceeds the top of the range, your ability to contribute is eliminated.

Married individuals who file separately and live apart for the full year are treated as single individuals for the income limitations. However, separate filers who live together at any time during the year are subject to a phaseout range of $0 to $10,000.

Is your income too high to qualify?

At first glance, these figures may cause you to assume you’re ineligible for Roth contributions. But take another look.

When calculating MAGI for Roth IRA eligibility purposes, self-employed individuals may be able to significantly reduce their taxable income through deductions for:

  • Certain business expenses, such as rent, home office expenses and computer costs,
  • Contributions to a tax-deferred retirement plan, such as a solo 401(k), SEP IRA or SIMPLE,
  • Health insurance premiums, and
  • Self-employment tax.

These deductions, along with others, are subtracted when calculating MAGI. Therefore, a self-employed person can have relatively high gross income from his or her business while having a much lower MAGI.

The choice between contributing to a Roth IRA or a tax-deferred account isn’t an all-or-nothing proposition. Depending on your situation, you may decide to contribute to both types of accounts, subject to applicable limits. Contributing to a tax-deferred retirement plan provides immediate tax savings. And, because these contributions lower your MAGI, they may put your taxable income below the phaseout limits for Roth IRA contributions.

Additional benefits

The main upside of contributing to a Roth IRA is that qualified withdrawals won’t be taxed. This can be advantageous if you expect to be in a higher tax bracket in retirement or if tax rates increase. Moreover, withdrawals from Roth accounts aren’t counted when calculating the taxable portion of your Social Security benefits.

Another Roth IRA advantage is that you don’t have to take withdrawals at any age, meaning the account can continue to grow tax-free. With a traditional IRA (and other tax-deferred retirement accounts), at age 73, you generally must begin to take required minimum distributions or face a penalty equal to 25% of the amount you should have withdrawn but didn’t. In addition, if your Roth IRA is passed on to your heirs, it can continue to grow tax-free, and their withdrawals generally will be tax-free. However, most nonspouse beneficiaries will be required to deplete the account within 10 years of inheriting it.

Bottom line

A Roth IRA offers many potential benefits, and self-employed individuals may be more likely to qualify to make Roth IRA contributions than other taxpayers with similar gross incomes. But they aren’t right for every situation. We can help evaluate your eligibility and develop a long-term retirement strategy that aligns with your personal and financial goals.

To learn more, contact your Smolin representative.

 

Make Smart Moves for Your 401(k) in 2025
Make Smart Moves for Your 401(k) in 2025 850 500 smolinlupinco

Retirement may seem far off, but smart saving now can make all the difference—and a 401(k) is one of the best ways to do that. If your employer offers a 401(k) or Roth 401(k), contributing as much as you can in 2025 is a smart way to build your nest egg.

If you’re not already contributing the maximum allowed, this might be the year to bump your contributions. Thanks to tax-deferred compounding (or tax-free for Roth accounts) growth, even small increases can make a big difference in your retirement savings.

With a 401(k), you choose to set aside a certain amount of your paycheck, and your employer contributes it to your retirement plan. Contribution limits are adjusted for inflation annually with a modest increase in 2025. The limit will be $23,500 (up from $23,000 in 2024).

Employees who are 50 or older by year-end can also make an additional $7,500 in “catch-up” contributions, allowing them to save up to $31,000 in 2025 (up from $30,500 in 2024).

Starting in 2025, a new law allows certain 401(k) plan participants to contribute even more. Those who are 60, 61, 62 or 63 in 2025 can make catch-up contributions of $11,250.

Note: These contribution amounts also apply to 403(b)s and 457 plans.

Traditional 401(k)s

A traditional 401(k) has several benefits, including:

  • Pretax contributions. These can lower your modified adjusted gross income (MAGI) and may even help you reduce or avoid the 3.8% net investment income tax.
  • Tax-deferred growth. This means you won’t pay income tax on the earnings until you take distributions.
  • Employer matching. The option allows your employer to contribute pretax funds, potentially matching some or all of your contributions.

If you already have a 401(k) plan, take some time to review your contributions and consider increasing your contribution rate to get as close to the $23,500 limit (plus any eligible catch-up amount) as your budget will allow. Since the contributions are pretax, you’ll also see a reduction in taxable income on your paycheck.

Roth 401(k)s

If your employer also offers a Roth option in its 401(k) plans, you can choose to make some or all of your contributions as Roth contributions. While these won’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions can be particularly beneficial for higher-income earners who aren’t eligible to contribute to a Roth IRA. This is because the ability to contribute to a Roth IRA is reduced or phased out once your adjusted gross income (AGI) exceeds certain amounts.

Planning for the future

If you have questions about how much to contribute or how to best balance traditional and Roth 401(k) contributions, reach out to your Smolin advisor.  We’re also here to help you explore additional tax and retirement-saving strategies that might fit your needs.

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