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

Roth 401(k)s combine the higher contribution limits of a 401(k) with some of the tax-free features of a Roth IRA.
Arielle O'Shea
By Arielle O'Shea 
Edited by Chris Hutchison Reviewed by Michael Randall
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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 see where you are

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. You can contribute $22,500 in 2023, plus $7,500 if you're 50 or older.

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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 401(k)’s annual contribution limit of $22,500 in 2023 ($30,000 for those age 50 or older).

  • There is no income limit for a Roth 401(k).

  • The Roth IRA’s after-tax contributions, so qualified withdrawals are tax-free.

More money now vs. later

It can be hard to turn your back on those attributes, but is a Roth 401(k) suitable for you? Here are the factors to consider.

  • 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).

  • 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 tax-free qualified withdrawals extends to your beneficiaries.

  • 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.

Your tax rates now vs. later

If you can commit to investing the tax savings from a traditional 401(k) contribution, this debate becomes largely about comparing your tax bracket now versus in the future.

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 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.

  • 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. (Here are the top Roth IRA providers.)

  • Then there’s the reverse scenario: You’d rather not access that money at all. Like traditional 401(k)s and traditional IRAs, Roth 401(k)s require you to begin taking distributions at 73. These are called required minimum distributions. Starting in January 2024, Roth 401(k)s won't be subject to required minimum distributions, but if you're retiring before then, the Roth 401(k) has an easy way out: You can roll its balance directly into a Roth IRA without a tax burden. The Roth IRA doesn’t require minimum distributions, so you could preserve that money and pass the account to your heirs.

If you need help managing your 401(k) (whether it’s a traditional or a Roth), some online providers will manage your account for you at your existing brokerage. And online planning services, such as the providers on our list of the best financial advisors, offer access to human advisors who can advise you on how to invest your 401(k).

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