After-tax contributions are amounts an employee puts into a retirement plan out of pay that has already been taxed, so they create basis in the plan rather than a deduction. The tax rules call that basis cost, or investment in the contract, and the point of it is that the same dollars are not taxed twice: your cost is generally your net investment in the plan as of your annuity starting date, and it does not include pre-tax contributions (IRS, Publication 575, Pension and Annuity Income, for use in preparing 2025 returns).
What the basis does not cover is what those dollars earned. That split, between contributions that were taxed on the way in and earnings that were not, is the whole subject.
The Earnings Do Not Inherit the Basis
A common assumption is that after-tax money can be pulled back out first, tax free, leaving the earnings behind for later. That is not how a distribution from a qualified plan works. Where you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you can generally allocate only part of it to the cost of the contract, excluding from gross income the part allocated to cost and including the remainder (IRS, Publication 575).
So each dollar taken out is part return of basis and part taxable income, in the ratio the basis bears to the balance it sits in. Which balance that is turns out to be the decisive question.
The Rule That Decides the Ratio
Some plans treat the employee’s own contributions and the earnings on them as a separate contract from the employer’s money. Where they do, the denominator shrinks and far more of a distribution comes back tax free.
The IRS runs the comparison on one set of facts. Ryan participates in a defined contribution plan that treats employee contributions and earnings allocable to them as a separate contract. He receives a non-annuity distribution of $5,000 before his annuity starting date. He had made after-tax contributions of $10,000, the earnings allocable to his contributions were $2,500, his employer also contributed $10,000, and the earnings allocable to the employer contributions were $2,500 (IRS, Publication 575).
Separate contract, so the denominator is Ryan's own money only
tax-free 5,000 x (10,000 / 12,500) = 4,000
taxable 5,000 - 4,000 = 1,000
Not a separate contract, so the denominator is the whole balance
tax-free 5,000 x (10,000 / 25,000) = 2,000
taxable 5,000 - 2,000 = 3,000Both results are stated in IRS, Publication 575. The contributions, the earnings and the distribution are identical in the two columns. Only the plan’s own treatment differs, and it triples the taxable amount. That is a plan document question rather than a taxpayer election, and it is the first thing to establish before quoting anybody a number.
After-Tax Is Not the Same as Roth
Both are funded with money that has already been taxed, which is why the two get treated as interchangeable. They are not, and the difference is entirely in the earnings.
In a designated Roth account, your cost is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements, along with any in-plan Roth rollovers and any designated Roth nonelective or matching contributions you included in income (IRS, Publication 575). So far that mirrors an ordinary after-tax contribution.
The divergence is at distribution. If you receive a qualified distribution from a designated Roth account, the distribution is not included in your gross income, and that applies to both your cost in the account and the income earned on that account (IRS, Publication 575). Ordinary after-tax contributions never get that treatment for their earnings.
Qualified is a defined term with two conditions, not a description. A qualified distribution is generally one made after a 5-tax-year period of participation, and made on or after the date you reach age 59 1/2, made to a beneficiary or your estate on or after your death, or attributable to your being disabled (IRS, Publication 575). The clock is not the account’s age in months: the 5-tax-year period begins with the first tax year for which a contribution was made to the participant’s designated Roth account in the plan, so a first contribution for 2025 means the first year a qualified distribution can be made is 2030 (IRS, Publication 575).
Miss either condition and the distribution is not qualified, in which case the designated Roth account is treated as a separate contract and the ordinary allocation rules apply (IRS, Publication 575).
Where a Firm Meets the Number
Almost always as a tracking problem, decades after the contributions were made.
The reporting hook is the distribution form. On a distribution from a designated Roth account, the amount to subtract from the total is any contributions that were taxable to you when made, usually shown in box 5 of Form 1099-R (IRS, Publication 575). Where that box is blank, or a client has changed employers, rolled a balance over or lost the old statements, the basis is not gone as a matter of law, but it is gone as a matter of evidence, and a basis nobody can evidence is one the return cannot safely claim.
Two habits protect it. Carry the after-tax basis forward in the client file as a standing figure rather than rebuilding it each year from whatever the current form shows, and establish the plan’s separate-contract treatment once and record it, because that single fact changes every subsequent calculation.
Common Questions
The earnings. Both go in taxed, and both create basis that comes back out tax free. Only a designated Roth account can deliver the earnings tax free too, and only on a qualified distribution (IRS, Publication 575). Earnings on ordinary after-tax contributions are taxable when distributed, however long they sat there.
The contributions themselves, yes, but not necessarily all at once and not by choosing to take them first. A pre-annuity-starting-date distribution from a qualified plan is allocated between cost and income, so only part of it is excluded (IRS, Publication 575). How large that part is depends on whether the plan treats the employee’s contributions as a separate contract.
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own return preparation and workpaper work through a trial task so its reviewers stay on the judgment calls.
