What Is a Roth 401(k) And How Does It Work?

A 401(k) is key to many retirement nest eggs, but about half of plan sponsors now offer a second option: a Roth 401(k).

What is a Roth 401(k)?

A Roth 401(k) is a type of 401(k) that allows you to make after-tax contributions and then get tax-free withdrawals when you retire. Traditional 401(k)s, on the other hand, allow pre-tax contributions and the withdrawals in retirement are taxable.

» On track for retirement? Use this 401(k) calculator to find out

Can I contribute to both a 401(k) and a Roth 401(k)?

Most employers that offer both a Roth 401(k) and a traditional 401(k) will let you switch back and forth between them or even split your contributions. Employers may even match Roth 401(k) contributions. In fact, if your employer offers matching dollars and you contribute to a Roth 401(k), you'll also have a traditional 401(k) because the matching amount must go into a pretax account.

Using both accounts — especially if you’re not eligible for a Roth IRA because of income limits — can enable tax diversification in retirement. You’ll be able to choose whether to pull money from a tax-free or a tax-deferred pot, or a combination of the two, each year. That will let you better manage your taxable income.

What are the Roth 401(k) contribution limits?

The Roth 401(k) contribution limits are the same as traditional 401(k) contribution limits. In 2024, you can contribute $23,000, and those 50 and older get a catch-up contribution of $7,500.

In 2025, the limit will rise to $23,500 and the catch-up contribution ($7,500) will remain the same; however, thanks to the Secure 2.0 Act, those ages 60 to 63 will get a higher catch-up contribution of $11,250.

The Secure Act also includes a mandate that catch-up contributions for highly paid retirement plan participants — defined as those who earn over $145,000 — be made to a Roth account; that change won't go into effect until 2026.

What are the benefits of a Roth 401(k)?

The Roth 401(k) brings together the best of a 401(k) and the much-loved Roth IRA. It features:

• The same 401(k) annual contribution limits.

• No income limit.

• After-tax contributions, so qualified withdrawals are tax-free.

However, there are a few factors to consider before deciding whether a Roth 401(k) is a better option than the traditional flavor.

More money now vs. later

It may cost you more on the front end to use a Roth 401(k)

Contributions to a Roth 401(k) can hit your budget harder today because an after-tax contribution takes a bigger bite out of your paycheck than a pretax contribution to a traditional 401(k).

But the Roth account can be more valuable in retirement

That’s because when you pull a dollar out of that account, you get to put that entire dollar in your pocket. When you pull a dollar out of a traditional 401(k), you can keep only the balance after paying taxes on the distribution. Another plus that comes with Roth 401(k)s? In most cases, the benefit of those tax-free qualified withdrawals extends to your beneficiaries.

Ultimately, contributing the maximum to either account each year yields the same pot of money in retirement. The traditional 401(k) balance would then be reduced by your tax rate in retirement, whereas the Roth 401(k) balance would remain whole.

The exception is if you can commit to investing the tax savings from the traditional 401(k) contributions you make each year — which you'd need to do in a separate account. If you do that, this debate becomes largely about comparing your tax bracket now versus in the future.

Your tax rates now vs. later

If your tax rate is low now and you expect it to be higher in retirement

• You may want to make contributions with after-tax dollars — which you can do with a Roth 401(k).

• Then you won’t pay taxes at that higher rate when you take qualified distributions in retirement.

• This scenario of lower rate now, higher rate later can affect many workers, especially those early in their careers. Inflation, your income and standard of living likely will all increase over time, so you may want to draw more money in retirement than you’re earning now.

• There’s also the possibility of across-the-board legislative tax increases; current tax rates are low when put in historical context.

If your tax rate is higher now than you expect it to be in retirement

• It can make sense to contribute to a traditional pretax 401(k).

• You’ll then pay taxes at that expected lower tax rate when taking distributions in retirement.

• If you’re closer to retirement, you may have a better idea of how your tax rate may change in those years. Many retirees live frugally, resulting in a lower tax burden.

Which is best for you? Compare the Roth 401(k) vs. the traditional 401(k)

Roth 401(k) withdrawal rules

The distribution rules for a Roth 401(k) aren’t as flexible as those for a Roth IRA, but the 401(k) version still has benefits.

• Unlike the IRA version, you can't withdraw contributions from a Roth 401(k) any time you like. The Roth 401(k) has a five-year rule for distributions; you must hold the account for five years before distributions are considered qualified and can be taken tax-free. That rule applies even if you’ve reached 59½, the age at which retirement distributions are typically allowed. That's something to consider if you’re getting a late start and want to access that money soon. In that case a Roth IRA may be a better choice.

• Roth 401(k)s used to require you to begin taking required minimum distributions at a certain age. But Roth 401(k)s are no longer subject to RMDs as of 2024.