Understanding the Three Buckets Inside Your 401(k)

Many professionals assume their 401(k) offers a single, straightforward choice: contribute money now, get a tax break, and worry about the details later. In reality, today’s 401(k) plans often contain three very different tax buckets, each with its own rules, advantages, and long-term implications for retirement income. Understanding how traditional, Roth, and after-tax contributions work—and how they interact—can materially change how flexible and tax-efficient your retirement strategy becomes.

For executives and senior professionals who are already saving aggressively, these distinctions are no longer academic. They shape how much control you will have over taxes, cash flow, and planning opportunities in retirement.

The Traditional 401(k): Deferring Taxes for Tomorrow

The traditional 401(k) is the most familiar option. Contributions are made with pre-tax dollars, showing up as a reduction in your taxable income today. That immediate tax benefit is appealing, particularly for households in higher brackets during peak earning years.

The trade-off comes later. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions (RMDs) eventually dictate when and how much you must take out. For many retirees, this creates uncertainty: future tax rates are unknown, and large required withdrawals can push income—and taxes—higher than expected.

Traditional contributions still play an important role, especially when current tax rates are clearly higher than what you expect in retirement. But relying exclusively on this bucket can limit flexibility down the road.

The Roth 401(k): Paying Taxes Now for Tax-Free Income Later

Roth 401(k) contributions reverse the timing. You pay taxes today, but qualified withdrawals in retirement—including all growth—are tax-free. That clarity is powerful. It allows retirees to spend with confidence, knowing that distributions will not increase their tax bill.

For professionals early in their careers or those expecting rising income, the Roth option can be especially attractive. Even for high earners, having some assets in a tax-free bucket provides balance. It creates options when coordinating Social Security, pensions, charitable giving, or future tax law changes.

Roth contributions do not eliminate RMDs inside the plan, but many retirees roll Roth 401(k) balances into Roth IRAs, where RMDs are not required. The result is greater long-term control over taxable income.

After-Tax 401(k) Contributions: Often Overlooked, Often Powerful

The after-tax 401(k) bucket is the least understood—and frequently the most underutilized. These contributions are made with dollars that have already been taxed, similar to Roth contributions. The key difference is that earnings on after-tax contributions are taxable when withdrawn unless they are converted.

Why would someone use this option? Contribution limits. In 2026, employee deferrals to traditional and Roth 401(k)s are capped, but the total amount that can go into a 401(k)—including employer contributions and after-tax dollars—is much higher. For high earners who are already maxing out their standard contributions, after-tax contributions can open the door to saving significantly more each year.

On their own, after-tax contributions are not especially compelling. Their real value emerges when paired with a strategy known as the Mega Backdoor Roth.

The Mega Backdoor Roth: Turning After-Tax Dollars into Tax-Free Growth

The Mega Backdoor Roth is not a separate account, but a strategy that uses the after-tax 401(k) bucket as a bridge into Roth assets. When a plan allows either in-service Roth conversions or in-service distributions, after-tax contributions can be moved—often quickly—into a Roth 401(k) or Roth IRA.

When executed properly, this strategy converts dollars that would otherwise generate taxable earnings into assets that can grow and be withdrawn tax-free. For high-income professionals who are phased out of direct Roth IRA contributions, this can be one of the most effective ways to build substantial tax-free retirement savings.

Not every 401(k) plan permits this approach, and the details matter. Timing, plan rules, and coordination with other savings goals all require careful attention. But when available, the Mega Backdoor Roth can meaningfully change the tax profile of a retirement plan.

Bringing the Buckets Together

A well-designed retirement strategy rarely relies on just one type of contribution. Traditional, Roth, and after-tax buckets each serve a purpose. Together, they create flexibility—allowing retirees to manage taxes, adapt to changing laws, and align withdrawals with their broader financial goals.

For many senior professionals, the biggest missed opportunity is not saving enough, but saving in the right places. Understanding what your 401(k) truly offers is often the first step toward uncovering strategies—like the Mega Backdoor Roth—that may already be hiding in plain sight.

If you are unsure how your plan is structured, or how these options fit into your broader retirement picture, a thoughtful review can provide clarity and confidence as you plan for the years ahead. You can take that first step by setting up a phone call here