After Tax vs. Roth: Which is Better?

Shawn Plummer

CEO, The Annuity Expert

When it comes to retirement savings, after-tax retirement plans or Roth retirement plans is a big question. So which one should you choose? This article will compare after-tax retirement plans, Roth IRA, and Roth 401(k) plans to help you decide which type of account is best for your situation.

After-Tax vs. Roth Contribution Type

  • Roth IRA: Employee elective contributions are made with after-tax dollars.
  • Roth 401(k): Contributions are made with after-tax dollars.
  • After-Tax: Contributions are made with after-tax dollars.

After-Tax vs. Roth Contribution Limits

  • Roth IRA: The annual contribution limit is $6,000 in 2022. Employees over age 50, can contribute an additional $1,000.
  • Roth 401(k): The annual contribution limit is $20,500 in 2022. Employees over age 50, can contribute an additional $6,500.
  • After-Tax: No contribution limits.

After-Tax vs. Roth Income Limits

  • Roth IRA: Individuals can not earn more than $144,000. Married couples can not earn more than $214,000.
  • Roth 401(k): No income limits.
  • After-Tax: No income limits.

After-Tax vs. Roth Taxation

  • Roth IRA: Withdrawals are tax-free if IRS requirements are met.
  • Roth 401(k): Withdrawals are tax-free if IRS requirements are met.
  • After-Tax: All the investment gains are taxed as ordinary income.

Required Minimum Distributions (RMD)

  • Roth IRA: No RMDs.
  • Roth 401(k): RMDs are required starting at age 72.
  • After-Tax: No RMDs.

What is a Roth IRA?

A Roth IRA is a type of IRA account that saves money for your retirement. Contributions made to a Roth IRA are funded with money already taxed. However, you won’t have to pay taxes on the money you withdraw from the Roth IRA if you meet a few IRS conditions.

What is a Roth 401(k)?

A Roth 401(k) is a type of 401(k) retirement plan. Contributions made to a Roth 401(k) are funded with money already taxed. Future withdrawals during retirement are tax-free.

Related Reading: 401k vs. Roth 401k: What’s the Difference? What is an After-Tax Retirement Plan?

Also known as a non-qualified retirement plan, contributions are made funded with money already taxed. All the investment gains earned before and during retirement are taxed as ordinary income. Annuities and permanent life insurance are considered after-tax retirement plans.

How to spend a 401(k) plan efficiently in retirement

Employees can’t touch their 401(k) plans without a tax penalty until they’ve reached the age of 59½ years. At that time, a 401(k) plan owner can roll over their retirement savings plans into a deferred IRA annuity with a lifetime income rider without tax consequences. The annuity will then equally distribute (now or in the future) a percentage of the retirement account for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the account has run out of money.

How to spend a Roth IRA efficiently in retirement

Once the Roth IRA requirements are met, an owner can transfer their account into a Roth annuity with a lifetime income rider. The annuity will then distribute a tax-free income for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the Roth IRA has run out of money.

Younger investors can contribute to a new Roth IRA annuity or convert their traditional IRAs into a Roth IRA annuity and guarantee their future tax-free income during retirement as well.

How to spend an After-Tax plan efficiently in retirement

Account owners can’t touch their after-tax retirement plans without a tax penalty until they’ve reached the age of 59½ years (most cases). At that time, a plan owner can transfer (1035 Exchange) over their retirement savings plans into a deferred IRA annuity with a lifetime income rider without tax consequences. The annuity will then equally distribute (now or in the future) a percentage of the retirement account for the rest of the retiree’s lifetime or married retirees’ lifetimes, even after the account has run out of money. Only earned gains will be taxed as ordinary income.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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