NUA and After-Tax 401(k) Contributions: How Non-Roth Basis Changes the Tax Calculation
Many employees assume after-tax contributions in their 401(k) complicate or reduce the NUA benefit. The opposite is true. The non-Roth after-tax money you put into the plan — your "investment in the contract" under IRC § 72 — comes out tax-free at distribution, even in an NUA election. This means a larger after-tax basis reduces the ordinary income bite in the distribution year while leaving the capital gain layer intact.
Two types of "after-tax" in a 401(k)
The phrase "after-tax" inside a 401(k) describes two very different things that often get confused:
- Roth 401(k) contributions: After-tax, earmarked as Roth, tracked in a separate sub-account. Growth is tax-free. At distribution, Roth balances are not subject to NUA treatment — Roth assets can't hold employer stock for NUA purposes in most plans, and the Roth account has its own favorable tax treatment. This guide is not about Roth contributions.
- Non-Roth after-tax contributions: After-tax employee contributions to the traditional (pre-tax) 401(k) — often made under plans that allow contributions beyond the pre-tax deferral limit up to the IRC § 415(c) combined limit. Sometimes called the "mega backdoor Roth" setup (because many employees immediately convert these to Roth). If you made these contributions and did not convert them to Roth, they are your "investment in the contract" under IRC § 72 — and they come out tax-free when you eventually take a distribution, including an NUA distribution.
The rest of this guide focuses on scenario 2: non-Roth after-tax contributions that were not subsequently converted to Roth in-plan.
The standard NUA tax structure (no after-tax contributions)
In a typical NUA distribution where all contributions were pre-tax (employee deferrals and employer match), the tax structure has two layers:1
| Layer | Amount | Tax treatment | When taxed |
|---|---|---|---|
| Cost basis (Box 2a) | What the plan paid for the shares | Ordinary income | Year of distribution |
| NUA appreciation (Box 6) | FMV at distribution minus cost basis | Long-term capital gains (automatic) | Year of sale |
Box 2a is the taxable ordinary income reported on your 1099-R — the amount you owe tax on at distribution. Box 6 is the NUA that defers as long-term capital gain until you sell.
How after-tax contributions change the structure
When you have non-Roth after-tax contributions in the plan that are attributable to employer stock, those contributions are your "investment in the contract" under IRC § 72.2 At distribution, the IRS allows you to recover your investment in the contract tax-free — even in an NUA election.
This creates a three-layer structure:
| Layer | Amount | Tax treatment |
|---|---|---|
| After-tax contribution recovery | Employee after-tax contributions attributable to the distributed stock | Tax-free (return of investment in the contract) |
| Pre-tax cost basis (Box 2a) | Plan cost basis minus after-tax contributions | Ordinary income |
| NUA appreciation (Box 6) | FMV at distribution minus total plan cost basis | Long-term capital gains (automatic) |
Worked example: $800K position with mixed basis
James is 63 and retiring. His 401(k) holds 4,000 shares of employer stock now worth $200/share ($800,000 total). His plan records show:
- Total plan cost basis in the stock: $80,000 (what the plan paid for all 4,000 shares)
- Employee after-tax contributions attributable to the stock: $20,000 (James made voluntary non-Roth after-tax contributions in the plan's early years that were invested in employer stock)
Compare the NUA tax calculation with and without recognizing the after-tax layer:
| Without after-tax basis | With $20K after-tax basis | |
|---|---|---|
| FMV at distribution | $800,000 | $800,000 |
| Plan cost basis | $80,000 | $80,000 |
| NUA (Box 6) | $720,000 | $720,000 |
| After-tax recovery (tax-free) | $0 | $20,000 |
| Taxable ordinary income (Box 2a) | $80,000 | $60,000 |
| Mandatory 20% withholding (on Box 2a) | $16,000 | $12,000 |
| Federal tax at 24% bracket (ordinary income) | ~$19,200 | ~$14,400 |
Simplified. State taxes excluded. LTCG tax on Box 6 is the same in both scenarios. The after-tax contribution reduces Year 1 ordinary income by $20,000 and saves ~$4,800 in federal tax (24% bracket). Mandatory withholding is also reduced, easing cash-flow requirements at distribution.
The point: James's after-tax contributions save him additional tax in the distribution year — on top of the NUA benefit — by converting $20,000 of would-be ordinary income into a tax-free return of capital. Failing to identify and report this after-tax basis means overpaying at distribution.
NUA amount is unaffected by after-tax contributions
One common misconception: that after-tax contributions "reduce the NUA" or make the election less valuable. They don't. The NUA amount is defined as FMV at distribution minus the plan's total cost basis in the securities — including both pre-tax and after-tax contributions attributable to those shares.1
If the plan paid $80,000 total for the shares (some with pre-tax contributions, some with after-tax), the NUA is FMV minus $80,000. The NUA is the same either way. What changes is how that $80,000 is taxed at distribution — the after-tax portion exits tax-free, the pre-tax portion exits as ordinary income. The $720,000 capital gain is unchanged.
The in-plan Roth conversion trap
Many 401(k) plans now allow in-plan Roth conversions: you can convert non-Roth after-tax contributions to Roth status inside the plan. This is often the "mega backdoor Roth" strategy — make the after-tax contribution, then immediately convert to Roth to get tax-free growth.
If you converted your after-tax contributions to Roth before retirement, those dollars are now Roth — they no longer count as "investment in the contract" for NUA purposes. The tax-free recovery benefit is gone. The after-tax money has already been converted into a Roth sub-account with its own favorable rules, and it's no longer available to reduce Box 2a on an NUA distribution.
If you have unconverted non-Roth after-tax contributions remaining (not yet converted to Roth), those are your investment in the contract and should reduce the taxable portion of your NUA distribution.
Pro-rata allocation: which stock lots carry the after-tax basis?
If your 401(k) holds many investment options — employer stock, mutual funds, bond funds — and you've made after-tax contributions over the years, how does the plan determine what portion of the after-tax contributions is attributable to the employer stock specifically?
In most plans, if after-tax contributions were directed generally (not to employer stock specifically), the attributable amount is calculated pro-rata across all plan assets at the time of the distribution. Example: if employer stock is 35% of your total plan balance, approximately 35% of your remaining after-tax contributions would be allocated to the employer stock lots for NUA basis purposes.
Some plans — particularly older or simpler plans — track after-tax contributions separately by investment option if the participant directed them into employer stock. In that case, the full after-tax amount directed to employer stock applies directly as investment in the contract for NUA purposes.
Ask your recordkeeper how they track after-tax allocation. The answer determines how much of your after-tax balance reduces Box 2a. A fee-only NUA specialist can review the plan documents and your recordkeeper statement to confirm the correct attribution before you execute.
Getting the numbers from your recordkeeper
To model your NUA distribution correctly, you need two numbers — not one:
- Plan cost basis in employer stock — what the plan paid for the shares, used to calculate Box 6 (NUA). See NUA Cost Basis for how to request this.
- Your investment in the contract (employee after-tax basis) — the portion of your plan balance that represents non-Roth after-tax contributions not yet converted to Roth. This reduces Box 2a.
To get the second number, call your recordkeeper and ask:
"What is my current employee after-tax (non-Roth) investment in the contract? I need the unrecovered after-tax basis attributable to my account, broken out from pre-tax and Roth balances, for NUA distribution planning under IRC § 72."
The recordkeeper should also provide a Form 5498 each year that shows total IRA/plan contributions — but for plan-specific after-tax tracking, a direct statement from the recordkeeper is more reliable.3
Confirm both numbers in writing before initiating the distribution. The 1099-R will show Box 2a based on what the plan calculates — if that figure seems higher than expected (ignoring your after-tax contributions), contact the plan administrator immediately. Corrected 1099-Rs can be issued, but it's far easier to resolve before you file.
Get matched with a fee-only NUA specialist
After-tax basis, pro-rata allocation, 1099-R reconciliation — these details determine whether you overpay at distribution. A fee-only NUA advisor models the full three-layer tax structure for your specific plan before you execute anything.
Sources
- IRC § 402(e)(4) — Net unrealized appreciation in employer securities; defines NUA as excess of FMV over the plan's cost in the securities. Plan cost basis includes all contribution types (pre-tax and after-tax). Values verified May 2026.
- IRC § 72 — Annuities; Certain Proceeds of Endowment and Life Insurance Contracts. Employee investment in the contract (after-tax contributions) is recovered tax-free at distribution. Pro-rata recovery rules under § 72(e).
- IRS Publication 575 — Pension and Annuity Income; explains cost recovery for lump-sum distributions, investment in the contract, and NUA treatment in the same distribution. IRS.gov.
- IRS Topic 412 — Lump-Sum Distributions. Confirms that employee after-tax contributions reduce the taxable amount of the lump-sum distribution (Box 2a) and that Box 6 carries the NUA as LTCG upon later sale.
Tax treatment of after-tax 401(k) contributions in NUA distributions is governed by IRC § 402(e)(4) and § 72. Mechanics verified against IRS Publication 575 and IRS Topic 412. Individual plans track after-tax contributions differently — confirm with your recordkeeper before executing any NUA distribution.