Supercharge Your Roth Savings With After-Tax Contributions

Americans hold more than $51.2 trillion in savings within retirement accounts, with IRAs representing roughly 39%, or $19.9 trillion of that total.¹ Within the IRA market, Roth assets have grown significantly, increasing from approximately 5% of total IRA assets in 2005 to approximately 12% by year-end 2024.² Despite this substantial growth, Roth assets still represent a relatively small share of overall IRA savings. Given persistent federal budget deficits and uncertainty surrounding major programs like Social Security and Medicare, future tax policy remains uncertain. Because Roth accounts can provide tax-free qualified distributions and may help manage the potential impact of higher tax rates in the future, investors may want to consider whether increasing Roth savings could be an effective strategy depending on their individual circumstances.

A Roth Gap for Today’s Pre-Retirees

For many of today’s pre-retirees, a significant share of their retirement savings is held in traditional (pre-tax) accounts, leaving them with relatively little exposure to Roth assets as they approach retirement. This is hardly surprising given that Roth accounts did not exist when many of these workers began their careers. Roth contributions within 401(k) plans were not introduced until 2006 at the earliest, and it took years before they were widely adopted by employer plans. By then, many in this cohort may have been earning significantly more and moved into higher tax brackets, making the upfront tax deduction from pre-tax contributions increasingly attractive. This heavy concentration within pre-tax retirement savings may result in a substantial future tax liability once those assets are distributed. While Roth conversions can help diversify retirement savings from a tax perspective, they may be less attractive during peak earning years when the additional income could be subject to higher tax rates.

Retirement Plan Contribution Limits for 2026

Maximum elective deferral to a defined contribution plan (401(k), 403(b), etc.) = $24,500

Catch-up contributions for those age 50 or older = $8,000

Additional catch-up contribution for those ages 60-63 = $3,250 ($8,000 + $3,250 = $11,250)

Overall limit on contributions into a defined contribution plan = $72,000*

Source: Internal Revenue Service (IRS), Notice 2025-67, “2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living.”
* Does not include catch-up contributions. Note that beginning in 2026, certain plan participants with more than $150,000 in prior-year FICA wages from the employer sponsoring the plan must make catch-up contributions on a Roth basis.

See more: Future Schlock: A Guide to the Singularity

Bridging the Roth Gap

For some participants, employer-sponsored retirement plans may offer a way to address this Roth gap through voluntary after-tax contributions. This opportunity may be particularly relevant for pre-retirees in their peak earning years when higher incomes may provide greater capacity to increase plan contributions, especially for those who are no longer funding college education for children. The key benefit of making after-tax contributions within the plan is the ability to subsequently convert those after-tax contributions to a Roth account, generally without generating additional taxable income on the contributed amount. This may allow a pre-retiree to build up significant savings in a Roth account. This approach is often referred to as a “Mega Backdoor Roth strategy.”

Consider this example:³

Jenny, age 58, has participated in her employer’s 401(k) plan for many years, making traditional pre-tax contributions and receiving employer matching contributions, also made on a pre-tax basis. While she is pleased with the substantial savings she has accumulated, she is concerned about the potential impact of higher taxes when she begins taking distributions in retirement.
This year, she contributes the maximum amount of $24,500 (not including the catch-up contribution) into the plan through salary deferral. Because she is in a relatively high tax bracket, she is making pre-tax contributions.
She receives a total employer contribution (match + profit sharing) of $15,500.
The total of her own salary deferrals plus employer contributions totals $40,000.
If her plan allows, Jenny contributes an additional $32,000 in after-tax dollars into the plan (overall annual plan contribution limit of $72,000 minus $40,000 in salary deferral and employer contributions).
Pursuant to plan rules, Jenny could transfer those after-tax contributions to either a Roth account within the plan, or a Roth IRA outside of the plan (participants must refer to the plan document for more details on options available to them).

In this example, Jenny has effectively made a higher contribution to a Roth account ($32,000) than is allowed within an IRA ($7,500*). If she continues for several years before retirement, Jenny can build a substantial pool of Roth assets that can provide tax-free qualified distributions in retirement.

* For 2026, the Roth IRA contribution limit is $7,500 which does not include the additional catch-up contribution limit ($1,100) for those age 50 or older. For 2026, eligibility to contribute directly to a Roth IRA phases out at modified adjusted gross income of $153,000-$168,000 for single and head-of-household filers and $242,000-$252,000 for married couples filing jointly.

Key Considerations for a Mega Backdoor Roth Strategy

Many employer plans do not allow after-tax contributions. Check the plan’s Summary Plan Description to determine if they are available and if any specific guidelines apply.
Investment account earnings on after-tax contributions generally are taxable when converted to a Roth. Accordingly, plan participants may want to roll over after-tax contributions to a Roth account as soon as administratively feasible to minimize the potential for taxable earnings to accumulate. Note that plan provisions determining how and when after-tax contributions can be transferred to a Roth account may vary widely.
The decision to make after-tax contributions should be considered in the context of broader financial priorities, including cash flow needs, emergency savings, debt repayment, and other competing financial goals.

Seek Professional Advice

Since individual circumstances will vary widely, it’s important to work with an advisor experienced in managing income and taxes in retirement, who is also aware of your personal financial situation and objectives. For those who require modest income in retirement and expect to be in a lower tax bracket, the potential benefits of holding funds in a Roth account may be reduced. But for many, having a mix of traditional, pre-tax retirement funds and Roth savings can provide more flexibility to manage taxes in retirement.

Bill Cass, Director of Wealth Planning

Endnotes

Source: Investment Company Institute (ICI), “U.S. Retirement Market, Second Quarter 2026.”
Investment Company Institute (ICI), “The U.S. Retirement Market” and historical IRA market data, as of December 31, 2024.
For illustrative purposes only. No assurance can be given. Actual results may vary.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.

Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Important Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Franklin Templeton has environmental, social and governance (ESG) capabilities; however, not all strategies or products for a strategy consider “ESG” as part of their investment process.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com. Investments are not FDIC insured; may lose value; and are not bank guaranteed.

You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe's website.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

A message from Advisor Perspectives and VettaFi: Discover something new! Click here to register for our upcoming webcasts.