By David L. Dunn, CPA/PFS, CFP®, CPWA®

Many executives stop contributing to their 401k when they hit the pre-tax contribution limit. You didn’t. You made after-tax contributions. Smart move. But the step you didn’t take may be quietly turning that move into a compounding tax liability you had no reason to expect.

This article is not about future 401k contributions. Read or watch 401k Critical Mistake #1 for that. This article is about the after-tax contributions you’ve already made sitting inside your 401k, unconverted, and silently generating earnings that could be fully taxable when distributed. That tax exposure could reach tens of thousands of dollars. That’s 401k Critical Mistake #2, and many executives won’t discover the cost until years of tax-free growth are already gone.

The Mistake

This mistake lives in the gap between what you did and what you didn’t know to do next: You made after-tax contributions to your 401k, but you haven’t yet rolled them over to a Roth IRA. Skipping this step could cost you tens or hundreds of thousands in avoidable taxes, money that could have been growing tax-free.

What’s at Stake

Unconverted 401k after-tax contributions can easily turn into a six-figure tax exposure. Here’s why: your 401k has two contribution limits. Many executives only know about one of these limits.

These are the IRS 401k pre-tax contribution limits for 2026:

$24,500 if you’re under 50

$32,500 if you’re 50 to 59, or 64 or older: that’s the $24,500 base plus an $8,000 catch-up contribution

$35,750 if you’re 60 through 63: that’s the $24,500 base plus an $11,250 catch-up contribution

New for 2026: if your individual compensation exceeded $150,000 in 2025, those catch-up contributions must be made as Roth contributions.

The IRS, however, sets a second limit, one far higher than the pre-tax limit.

For 2026, the total 401k contribution limit, which includes pre-tax, after-tax, and employer contributions, is:

$72,000 if you’re under 50

$80,000 if you’re 50 to 59, or 64 or older

$83,250 if you’re 60 through 63

That means, depending on your employer’s contribution, you could contribute up to $47,500 in after-tax contributions.

And when those 401k after-tax contributions are rolled to a new Roth IRA, the growth could be tax-free when distributed. That changes everything.

Maxing those limits is where the real opportunity begins. Many plans allow additional 401k after-tax contributions once you reach the pre-tax limit, contributions that open the door to powerful Roth rollover strategies, but only if handled correctly.

Let’s put a number on it.

Meet Maya, a 60-year-old senior executive at a leading tech firm. Over the years, Maya contributed $100,000 in 401k after-tax contributions. But she never rolled them over to a Roth IRA. Over time, those dollars generated $200,000 in earnings. The $100,000 in after-tax contributions? She can withdraw it tax-free. But the $200,000 in growth? Fully taxable as ordinary income when distributed. If Maya is in the 37% tax bracket, that’s a $74,000 tax bill, and that bill can grow larger every year those after-tax contributions stay inside the 401k.

These figures are illustrative. Additional federal and state taxes may apply depending on your situation.

The Strategy: 3 Steps to Get It Right

The longer those 401k after-tax contributions remain unconverted, the more earnings accumulate, which just makes the tax exposure worse. Here’s how to stop it.

Step one: Open a new Roth IRA and a new Traditional IRA with the brokerage firm of your choice.

Step two: Call your 401k provider. Have them roll over your after-tax contributions to your new Roth IRA. Next, have them roll over the earnings on the after-tax contributions to your new Traditional IRA. Done correctly, this avoids the 20% mandatory withholding.

Step three: Work with an advisor who has command of the IRS rules governing these rollovers. One misstep could trigger a tax bill you weren’t expecting.

Two Warnings

Two warnings stand between this strategy and a costly mistake.

Warning #1: Create a new Roth IRA and a new Traditional IRA for these rollovers. Do not use existing IRAs. By using new IRAs for these rollovers, you can preserve the strong creditor protection that comes with 401k assets. That protection can be lost if the rollover funds are commingled with existing IRA balances. I’ll cover this in an upcoming installment of The Critical Mistakes Series™. It’s too important to overlook.

Warning #2: This move might affect your ability to use another strategy called Net Unrealized Appreciation, or NUA, if you hold company stock in your 401k. I cover Net Unrealized Appreciation in 401k Critical Mistake #3, 401k Critical Mistake #4, 401k Critical Mistake #5, and 401k Critical Mistake #6. Be sure to read or watch those before making any decisions about your rollover.

The Bottom Line

You did what few executives do: you made 401k after-tax contributions. What you do next determines whether those dollars work for you, or against you. If rolling your 401k after-tax contributions to a new Roth IRA fits your situation, it may be the most important financial move you haven’t yet made.

Don’t Miss the Next Critical Mistake

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If you found this article helpful, please share it with a colleague who takes their 401k seriously. It could save them tens or hundreds of thousands.

If you haven’t yet read or watched 401k Critical Mistake #1, that mistake covers how to hyper-fund your 401k with after-tax contributions and how to convert them, so this tax problem doesn’t start.

Disclosures
David Dunn Wealth LLC (DDW) is a member firm of The Fiduciary Alliance LLC which is a Securities and Exchange Commission-registered investment adviser. See full disclosure HERE.