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What is the Difference Between Designated Roth and Voluntary After-Tax Contributions?

Updated: Apr 23, 2021

Self-Directed Solo 401(k)s offer two advantageous ways to increase tax-free money in retirement by allowing for designated Roth contributions and Voluntary After-Tax contributions, (if the plan is designed to include these provisions.) There is often some confusion, however, as to what the difference is between these two options.

Designated Roth Contributions

When a contribution, (the account basis,) is made to a designated Roth account, it is done so with income that has already been taxed, so the amount contributed does not provide an income tax deduction. The gain and/or income that grows in the account is on a tax-deferred basis. When the account holder makes a withdrawal from the account, the distribution, (basis, gain, and income,) is completely tax-free as long as the account holder is at least 59 ½ years old and it has been at least five years since he or she contributed the amount to be withdrawn.

Roth contributions can only be made to a Self-Directed Solo 401(k) as an elective salary deferral, so the amount is limited to $19,500 in 2020 for those less than 50 years old, or $26,000 for those 50 years old and older because of the $6,500 catch-up contribution.

Voluntary After-Tax Contributions

Voluntary After-Tax contributions are similar to Roth contributions in that they are also made with income that has already been taxed and they do not provide an income tax deduction. The contribution grows tax-deferred, as well, but the investment gains and income are taxed as ordinary income upon withdrawal. Since the basis was made with after-tax dollars, it is not taxed when withdrawn.

An after-tax contribution is not considered to be a “salary deferral” contribution, so it is not subject to the 2020 limit of $19,500/$26,000. Instead, it is subject to the overall 2020 contribution limit of $57,000 for those less than 50 years old or $63,500 for those 50 years old and older, which means that the account holder can contribute the full amount, ($57,000/$63,5000) with after-tax dollars.

An account holder can also use an after-tax contribution as a way to maximize, and reach, the annual limit by layering it on top of the salary deferral and profit-sharing contributions that a Self-Directed Solo 401(k) allows, should their combined amount be less than the $57,000/$63,500 limit.

Investing in almost any asset class using the Self-Directed Solo 401(k) Roth account can provide 100% tax-free distributions in retirement, per applicable rules and limits.

In-Plan Conversions (if the plan allows for them)

Since the gain and income earned on the after-tax contribution is taxable upon withdrawal, it is advisable to convert the contribution to the Roth account before it is invested. This way all of the after-tax contributions can be invested through the Roth account for 100 percent tax-free distributions in retirement, so long as the aforementioned requirements are met. This strategy is often referred to as a Mega Backdoor Roth.

An Unencumbered Advantage

When contributing to traditional 401(k) retirement plans, making after-tax contributions can be tricky, capped, or disallowed due to nondiscrimination testing. Since Self-Directed Solo 401(k) plans are designed for one-person business owners, (including spouse and business partners,) and does not include employee-participants, they are not subject to ERISA rules and testing requirements. This keeps the contribution amount uncapped, (per the limit,) making it one of the best ways to save/have access to a considerable amount of tax-free money in retirement, second only to permanent life insurance.


Nashional Self-Directed's Self-Directed Solo 401(k) plans include Roth and voluntary after-tax contribution options and in-plan conversion provisions.

Learn more about Self-Directed Solo 401(k) contribution types, limits, and calculations here.

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