Post-Tax vs. Roth Retirement Accounts Explained
When it comes to retirement savings, one common misconception is that post-tax retirement accounts and Roth accounts are the same thing. However, this is not true. Post-tax retirement accounts refer to accounts where contributions have already been taxed. While Roth accounts fall under this category, not all post-tax retirement accounts are Roth accounts. Let’s explore the key differences between them and what you should know.
Understanding the Difference
Post-tax retirement accounts can include Traditional Individual Retirement Accounts (IRAs), Roth IRAs, Roth 401(k), Roth 403(b), and some employer-sponsored plans. Employer-sponsored plans such as 401(k)s and 403(b)s are typically pre-tax retirement accounts. However, some plans may allow for after-tax contributions, also known as non-Roth after-tax contributions. The main differences in these post-tax retirement accounts are their tax treatment, contribution limits, and withdrawal rules.
Tax Treatment: Roth accounts offer tax-free growth, meaning that your earnings and investment gains are not subject to income tax when you withdrawal, if you meet certain conditions. However, the growth is tax-deferred in other post-tax retirement accounts. This means that while you aren’t paying income tax on your earnings yearly, you will have to pay income tax on them when you withdraw your money.
Contribution Limits: The Internal Revenue Service (IRS) sets annual contribution limits. For the 2025 tax year, those with Roth or Traditional IRAs can contribute up to $7,000 per year, with an additional catch-up contribution of $1,000 for people aged 50 and above. Those with an employer-sponsored plan can contribute up to $23,500, plus up to an extra $7,500 for those aged 50 and older.
Withdrawal Rules: Withdrawals from Roth accounts are tax-free. However, as mentioned above, withdrawals from other post-tax retirement accounts are subject to income tax on the portion representing investment gains and earnings, not the amount contributed.
| Traditional IRAs | Roth IRAs | Roth 401(k), 403(b) | Plans with non-Roth, after-tax contributions | |
| Tax Treatment | Tax-Deferred Growth | Tax-Free Growth | Tax-Free Growth | Tax-Deferred Growth |
| Contribution Limits | $7,000 | $7,000 | $23,500 | $23,500 |
| Catch-Up Contribution Limits (50 or older) | $1,000 | $1,000 | $7,500 | $7,500 |
| Withdrawals | Investment earnings and gains are taxed | Tax-Free* | Tax-Free* | Investment earnings and gains are taxed |
*If certain conditions are met.
Smart Retirement Planning
Understanding the difference between post-tax retirement accounts and Roth accounts is important for effective retirement planning. Misconceptions about these accounts could lead to unintended tax issues or missed opportunities for tax-free growth and withdrawals. By understanding each type of account’s specific features and benefits, you can make informed decisions aligned with your financial goals and optimize your retirement savings strategy.
This blog is up to date as of October 2024 and has not been updated for changes in the law, administration or current events.
