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The Roth 401(k) account was introduced in 2006. This retirement account was created by a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 and modeled after the Roth IRA, the Roth 401(k) is an employer-sponsored investment savings account that allows employees to save for retirement with after-tax money.
Participants in 403(b) plans are also eligible to participate in a Roth account. Although the ability to contribute to a Roth 401(k) was originally set to expire at the end of 2010, the Pension Protection Act of 2006 made the Roth 401(k) permanent.
Key Takeaways
- A Roth 401(k) is an employer-sponsored savings plan that grants employees the option of using after-tax dollars for retirement.
- Contribution limits for 2024 were $23,000 and for 2025 are $23,500. In addition, individuals 50 and older are allowed a catch-up contribution of $7,500 for 2024 and 2025.
- Your contributions are taxed, but any withdrawals you take after age 59½ will be tax-free if the account has been funded for at least five years.
- Roth 401(k)s do not have required minimum distributions.
- Roth 401(k)s are beneficial for those anticipating an increase or similarity in their income taxes in retirement.
Roth 401(k) Benefits
The benefits associated with the Roth 401(k) depend largely on your point of view. From the government’s perspective, the Roth 401(k) generates current tax revenues, whereas a traditional 401(k) generates future tax revenues.
You receive a tax deduction on your contributions to a traditional 401(k). From your perspective, the 401(k) account is expected to grow over time, and money that would have been lost to taxes will instead spend all of those years working for you. The government also wants those assets to grow because the tax deferral ends when the money is withdrawn from the account. In essence, the government gives you a tax break today in the hope that there will be even more money to tax in the future.
The Roth 401(k) works in reverse. The money you earn today is taxed today. When you put this after-tax money into your Roth 401(k), withdrawals that you take after you reach age 59½ will be tax-free if the account has been funded for at least five years. This works to your advantage if you expect to be in a higher tax bracket in retirement.
If it doesn’t work out as you anticipated (your tax bracket turned out to be lower in retirement than expected), the government benefits from collecting more taxes from you.
The Rules
You can contribute to a Roth 401(k), a traditional 401(k), or a combination of the two, assuming both are offered by your employer. The total annual amount paid into your accounts can’t exceed 100% of your compensation for the year, up to the annual limits. Total annual contributions (employer + employee) were capped at $69,000 for 2024 or $76,500 for individuals eligible for catch-up contributions. In 2025, the limit increased to $70,000 or $77,500 using catch-up contributions.
Your personal contribution limits remain the same regardless of whether you choose a traditional 401(k), a Roth 401(k), or both. The individual contribution limit for 2024 was $23,000, and the contribution limit for 2025 is $23,500. If you’re 50 or over, you can make catch-up contributions. For both 2024 and 2025, the catch-up contribution limit is $7,500.
The contribution limit is the primary advantage a Roth 401(k) has over a Roth or traditional IRA: The total amount you can contribute to traditional and Roth IRA accounts is $7,000 a year ($8,000 if you’re 50 or over) for 2024 and 2025.
The decision regarding which plan you choose depends largely on your financial situation. If you expect to be in a higher tax bracket after retirement than you are in your working years, the Roth 401(k) may be the way to go—it will provide tax-free withdrawals when you retire.
While it may seem intuitive that most investors will experience a decrease in their tax rate upon retirement, retirees often have fewer tax deductions, and there’s also the potential impact of future legislation, which could result in higher tax rates. Considering the uncertainty of tax rates in the future, young workers who currently have lower income tax rates may want to consider investing in after-tax programs like the Roth 401(k), essentially locking in the lower tax rate.
Factors To Consider
There are several factors that may influence whether or not you decide to open a Roth 401(k).
- Your company may not offer the Roth 401(k). Doing so is voluntary for employers, and they must set up a tracking system to segregate Roth assets from the company’s current plan. This may be an expensive proposition, and your employer may choose not to do it.
- Required minimum distributions are no longer required from designated Roth accounts.
- Having both a Roth and a traditional 401(k) will allow you to take money from your tax-free and/or tax-deferred accounts, which can help you manage your taxable income in retirement.
Any matching contributions your employer makes to your Roth 401(k) must be deposited into a traditional 401(k) account.
What Is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored plan in which an employee can make retirement contributions into the account. The employer may then match contributions and set vesting schedules to provide additional benefits to the employee. A Roth 401(k) is funded using after-tax contribution dollars, meaning any investment growth will occur tax-free.
Is a Roth 401(k) Better Than a 401(k)?
For some, a Roth 401(k) is better than a traditional 401(k). With a Roth 401(k), retirement contributions are made after taxes have been paid on those contributions. In return, any investment growth in the portfolio of a Roth 401(k) grows tax-free. Alternatively, a traditional 401(k) has better tax advantages upfront; however, future earnings are taxable when withdrawn in the future.
Broadly speaking, a Roth 401(k) is better for lower-income individuals who expect to be in a higher tax bracket in the future. Alternatively, a traditional 401(k) is usually better for current high earners who expect their tax bracket to fall in the future.
What Is the Disadvantage of a Roth 401(k)?
Contributions made into a Roth 401(k) are after-tax contributions. This means there is no tax benefit for these retirement contributions. Other forms of retirement savings offer better current, immediate tax incentives.
The Bottom Line
It’s wise to assess your current tax rate versus your expected future tax rate before making your decision about investing in a Roth 401(k). A tax rate that’s lower now than what you expect later makes this type of account attractive, but if the opposite is true, tax-deferred programs are probably a better option.
