What is the tax treatment of voluntary after-tax contributions?

Voluntary after-tax contributions are made to retirement accounts, and their tax treatment is structured to provide specific benefits. When individuals make these contributions, they do so with money that has already been taxed, meaning that the contributions themselves are not subject to further taxation when withdrawn. However, the earnings on those contributions are subject to income tax at the time of withdrawal.

This means that at the point of withdrawal, the individual can access the after-tax contributions without incurring any additional tax, but any growth or earnings that have accumulated on those contributions will be taxed as ordinary income. This principle is fundamental to understanding the treatment of after-tax contributions within retirement plans, differentiating between the treatment of the principal amount contributed and the earnings that accrue over time.