what is an after tax contribution 
an after tax contribution is money paid into a retirement or investment account after income taxes on those earnings have already been deducted when opening a tax advantaged retirement account an individual may choose to defer the income taxes owed until after retiring if it is a traditional retirement account or pay the income taxes in the year in which the payment is made if it is a roth retirement account some savers mostly those with higher incomes may contribute after tax income to a traditional account in addition to the maximum allowable pre tax amount they don t get any immediate tax benefit this commingling of pre tax and post tax money takes some careful accounting for tax purposes 1understanding after tax contributionsin order to encourage americans to save toward their retirement years the government offers several tax advantaged retirement plans such as the 401 k plan offered by many companies to their employees and the ira which anyone with earned income can open through a bank or a brokerage most but not all people who open a retirement account can choose either of the two main options the post tax roth option offers the attraction of a retirement nest egg that is not subject to further taxes it makes the most sense for those who believe they may be paying a higher tax rate in the future either because of their expected retirement income or because they think taxes will go up in addition money contributed post tax can be withdrawn at any time without a fat irs penalty being imposed the profits in the account are untouchable until the account holder is 59 5on the downside the post tax option means a smaller paycheck with every contribution into the account the pre tax or traditional option reduces the saver s taxes owed for the year the contributions are made and it is a smaller hit to current income the downside is that withdrawals from this type of retirement fund will be taxable income whether it s money that was paid in or profits from the money earned a roth ira by definition is a retirement account in which the earnings grow tax free as long as the money is held in the roth ira for at least five years contributions to a roth are made with after tax dollars and as a result they are not tax deductible however you can withdraw the contributions in retirement tax free 6both post tax and pre tax retirement accounts have limits on how much can be contributed each year if you have a pre tax or traditional account you will have to pay taxes on money withdrawn before age 59 and the funds are subject to a hefty early withdrawal penalty 8as noted the money deposited in a post tax or roth account but not any profits it earns can be withdrawn at any time without penalty the taxes have already been paid and the irs doesn t care but if it s a pre tax or traditional account any money withdrawn before age 59 is fully taxable and subject to a hefty early withdrawal penalty 5an account holder who changes jobs can roll over the money into a similar account available at the new job without paying any taxes the term rollover is meaningful it means that the money goes straight from account to account and never gets paid into your hands otherwise it can count as taxable income for that year 9special considerationsas noted above there are limits to the amount of money that a saver can contribute each year to a retirement account actually you can have more than one account or a post tax and a pre tax account but the total contribution limits are the same 10withdrawals of after tax contributions to a traditional ira should not be taxed however the only way to make sure this does not happen is to file irs form 8606 form 8606 must be filed for every year you make after tax non deductible contributions to a traditional ira and for every subsequent year until you have used up all of your after tax balance 11since the funds in the account are separated into taxable and non taxable components figuring the tax due on the required distributions is more complicated than if the account holder had made only pre tax contributions 