Roth 401(k) Basics and Beyond

A Roth 401(k) is a type of employer-sponsored retirement account that allows you to contribute after-tax dollars, which can then grow tax-free.

You can contribute up to $19,500 in 2022 to a Roth 401(k), and an additional $6,500 if you're 50 or older.

One of the key benefits of a Roth 401(k) is that withdrawals are tax-free in retirement, as long as you've had the account for at least five years and are 59 1/2 or older.

This can be a big advantage over traditional 401(k) plans, where you'll pay taxes on withdrawals in retirement.

On a similar theme: Can a Beneficiary Contribute to Their Own Able Account

The Roth 401(k) is a retirement savings plan that combines the benefits of a 401(k) and a Roth IRA. It's essentially a hybrid of the two, offering tax-free growth and withdrawals.

Here are some key facts about the Roth 401(k):

These features make the Roth 401(k) an attractive option for those who want to save for retirement and avoid taxes in the long run.

Roth 401(k) plans are only available through an employer, which means you can't set one up yourself.

Contributions are made using after-tax dollars through payroll deductions.

The contributions grow tax-free in your account.

Withdrawals are also tax-free as long as you've held the account for at least five years.

You'll need to wait until you're at least 59½ to make tax-free withdrawals.

A retirement plan is a type of savings plan that helps you prepare for life after work. It's a way to set aside money for your future, so you can live comfortably and securely.

There are different types of retirement plans, but most of them allow you to contribute a portion of your income on a regular basis. A Roth 401(k) is one type of retirement plan that allows you to make after-tax contributions and then get tax-free withdrawals when you retire.

In a traditional 401(k), you contribute pre-tax dollars, which means you don't pay taxes on that money until you withdraw it in retirement. This can be a good option if you expect to be in a lower tax bracket when you retire.

With a Roth 401(k), you contribute after-tax dollars, which means you've already paid taxes on that money. This can be a good option if you expect to be in a higher tax bracket when you retire and want to avoid paying taxes on your withdrawals.

A fresh viewpoint: Top Etfs for Roth Ira

Traditional 401(k) plans are a common way to save for retirement, but they do come with some tax implications.

Taxes are paid on the contributions before they're invested, which means you get to keep the entire amount in your account.

In Example 1, a pre-tax income of $2,000 was taxed at 20%, leaving a contribution amount of $1,600. The balance at retirement was $3,257.79, and taxes of 20% were paid on withdrawal, leaving after-tax proceeds of $2,606.23.

Taxes are paid on withdrawals from a traditional 401(k) in retirement, which can be a significant expense.

In Example 3, a higher tax rate of 25% in retirement resulted in after-tax proceeds of $2,443.34, which is less than the after-tax proceeds of $2,606.23 in Example 1 where the tax rate was 20%.

Here are the tax implications of traditional 401(k) plans in different scenarios:

The contribution limit for a Roth 401(k) is $23,500 in 2025, and individuals 50 and older can contribute an additional $7,500 as a catch-up contribution.

Additional reading: Able Account Contribution Limits 2024

Note that there is no income limit to participate in a Roth 401(k), making it a great option for those who want to contribute more than they could to a traditional 401(k).

To qualify for tax-free withdrawals, you must have held the account for at least five years and meet certain criteria, such as being 59½, disabled, or on the death of an account owner.

Here are the specific contribution limits for Roth 401(k)s:

Remember, you can't contribute more than your taxable income for the year, so be sure to keep that in mind when planning your contributions.

The Roth 401(k) contribution limits are adjusted annually for inflation and released by the IRS. You can contribute up to $23,500 in 2025, and those 50 and older can add an extra $7,500 as a catch-up contribution.

Individuals who are 50 and older can contribute an additional $7,500 as a catch-up contribution in 2025. This amount is also available in 2024, but the overall contribution limit was lower.

Explore further: 457 Dc Plan

The contribution limit for individuals under 50 is $23,500 in 2025, up from $23,000 in 2024. The catch-up contribution limit for those 50 and older also increased from $30,500 in 2024 to $31,000 in 2025.

Here's a breakdown of the Roth 401(k) contribution limits for 2024 and 2025:

Note that you can't contribute more than your taxable income for the year.

You can contribute to both a 401(k) and a Roth 401(k) if your employer offers both options. Most employers will let you switch back and forth between them or even split your contributions.

Employers may match Roth 401(k) contributions, and if they do, you'll also have a traditional 401(k) because the matching amount must go into a pretax account.

Switching between the two accounts 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.

Withdrawals of any contributions and earnings are not taxed as long as the withdrawal is a qualified distribution.

To qualify, you must have held the Roth 401(k) account for at least five years. This is a mandatory rule that applies to all withdrawals.

A qualified distribution also requires that the withdrawal must have occurred because of a disability, on or after the death of an account owner, or when an account holder reaches at least age 59½. This is a specific set of circumstances that must be met to avoid taxes on withdrawals.

The five-year rule applies even if you've reached 59 ½, the age at which retirement distributions are typically allowed. This is a key consideration if you're getting a late start and want to access that money soon.

Here's a summary of the qualified distribution criteria:

Choosing Contributions is a crucial decision when it comes to your 401(k). You want to choose the one that will keep your tax bill lowest, which is essentially a tax bet.

Financial advisors recommend considering your current tax bracket and future tax rate expectations. Many recommend Roth accounts for those in low salaries, typically younger working folks.

It's a good idea to diversify among pretax and Roth savings to grant tax flexibility in retirement. This can help strategically withdraw money from a Roth account for income.

A Roth 401(k) offers a unique savings opportunity, allowing higher earners to access a Roth account directly and letting all savers contribute more money to a Roth account than they could otherwise.

A Roth 401(k) is a great option for people who expect to be in a higher tax bracket later in life. This is because contributions are taxed at the lower tax rate, and distributions are tax-free in retirement.

Here are some key advantages of a Roth 401(k):

However, there are some downsides to consider. Contributions are made using after-tax dollars, which means you're out of pocket for the deposits you make in the year you make them.

Retirement savings plans can be a bit confusing, but let's break down the core advantages and disadvantages.

A Roth 401(k) can be a great option for people who expect to be in a higher tax bracket later in life. This is because contributions are taxed at a lower rate now, and distributions are tax-free in retirement.

One of the main advantages of a Roth 401(k) is that distributions are tax-free during retirement. This means you won't have to pay taxes on the money you withdraw.

Here are some key benefits of a Roth 401(k):

On the other hand, contributions are made using after-tax dollars, which means you're out of pocket for the deposits you make in the year you make them. Additionally, contributions don't reduce your taxable income, which is a drawback for some people.

Having a solid retirement plan is crucial for a secure financial future. You can contribute up to the same 401(k) annual contribution limits to a Roth 401(k).

A Roth 401(k) offers tax-free withdrawals in retirement, which means you won't have to worry about paying taxes on your hard-earned savings. This is a big advantage over traditional 401(k)s, where withdrawals are taxable.

One of the best things about a Roth 401(k) is that it has no income limit, so you can contribute to it regardless of your income level. This makes it a great option for high-income earners who might be limited by income restrictions on other retirement accounts.

With a Roth 401(k), you make after-tax contributions, which means you've already paid taxes on the money you contribute. This is different from traditional 401(k)s, where contributions are made before taxes are taken out.

By contributing to a Roth 401(k), you can enjoy tax-free growth and withdrawals in retirement, which can help your savings go further.

Discover more: What Is a Solo 401k Plan

Roth 401(k) adoption rates will rise significantly in the coming years. A 2022 retirement law called Secure 2.0 will require "catch up" 401(k) contributions to be made to Roth accounts for high earners.

This rule takes effect in 2026 and applies to workers with income exceeding $145,000 (indexed to inflation). High earners age 50 or older would be required to contribute any additional savings over the annual 401(k) limit to a Roth account.

Offering Roth as an option has become a best practice, and due to the mandate for high earners, we will continue to see Roth become commonplace. Workers can save up to $23,000 in a 401(k) for 2024, and those age 50 and older can save an extra $7,500 in catch-up contributions.

Related reading: 457b Withdrawal Age

A Roth 401(k) can be an attractive option, but it's essential to consider the costs involved. The fees associated with a Roth 401(k) can eat into your retirement savings.

A defined contribution plan like a 401(k) may not be sufficient to meet your retirement needs, so it's crucial to explore other options. This is especially true if you're not contributing enough to your plan to reach your retirement goals.

The costs of a Roth 401(k) can be higher than other retirement accounts, so it's vital to weigh the benefits against the expenses.

A Roth 401(k) is an employer-sponsored plan that helps people prepare for retirement. But it's not the only option available to investors.

A defined contribution plan like a 401(k) may not be sufficient to meet your retirement needs. This is because it's a type of plan that relies on the contributions of the investor.

Traditional 401(k)s are another type of employer-sponsored plan that allows investors to make pre-tax contributions. However, you'll have to pay taxes on withdrawals in retirement.

Roth IRAs are individual retirement accounts that allow investors to make after-tax contributions. This means you've already paid taxes on the money, so you won't have to pay taxes on withdrawals in retirement.

Traditional 401(k)s allow pre-tax contributions, meaning you don't pay taxes on the money you put in. This can be a big advantage if you expect to be in a lower tax bracket after retiring.

You'll still have to pay taxes on your withdrawals, but if you're in a lower tax bracket, that means you'll pay less in taxes overall. For example, if you contributed $2,000 to a traditional 401(k) and paid 20% in taxes, you'd only pay taxes on the withdrawals when you retire.

For another approach, see: Individual Retirement Account

The tax rates in the examples show that if tax rates are the same, a Roth 401(k) and traditional 401(k) would have similar results. However, if tax rates are lower in retirement, a traditional 401(k) would have more after-tax proceeds.

Here's a breakdown of the tax rates in the examples:

It may cost more up front to use a Roth 401(k) because an after-tax contribution takes a bigger bite out of your paycheck than a pretax contribution to a traditional 401(k).

Contributions to a Roth 401(k) can hit your budget harder today, making it essential to consider your financial situation before choosing between a Roth and traditional 401(k) plan.

The upfront cost of a Roth 401(k) can be a significant factor, especially for those living paycheck to paycheck.

Let's take a closer look at the side-by-side comparison of Roth and traditional 401(k) plans.

Contributions to traditional 401(k) plans are made pre-tax, which reduces your current taxable income. Contributions to Roth 401(k) plans, on the other hand, are made after taxes, with no effect on your current taxable income.

Worth a look: Rollover from Traditional Ira to Roth Ira Taxable

Both traditional and Roth 401(k) plans have the same contribution limits, subject to the IRC section 402(g) annual limit. For 2025, this limit is $23,500, with an additional $7,500 allowed for "catch-up" eligible individuals.

The tax treatment at distribution is where Roth and traditional 401(k) plans really diverge. Both contribution principal and earnings in traditional 401(k) plans are subject to Federal and most State income taxes when distributed. In contrast, contribution principal in Roth 401(k) plans is tax-free when distributed, and earnings are tax-free if part of a "qualified distribution."

A qualified distribution in a Roth 401(k) plan requires that the distribution be made at least five years after the first Roth deferrals are contributed and after one of the following events occurs: separation from service, disability, or death. Neither traditional nor Roth 401(k) plans can be distributed until one of these events occurs, although a plan may permit in-service distribution upon certain conditions.

Here's a quick summary of the differences between traditional and Roth 401(k) plans in a side-by-side comparison table:

You can contribute to a Roth 401(k) with pre-tax dollars, but the money grows tax-free, unlike a traditional 401(k) where earnings are subject to taxes.

The Roth 401(k) has a catch-up contribution limit of $25,000 per year for those 50 and older, which can really add up over time.

A Roth 401(k) allows you to withdraw contributions at any time without penalty, but you'll need to wait five years before withdrawing earnings tax-free.

Some employers offer a Roth 401(k) option in addition to a traditional 401(k), giving you more flexibility in how you save for retirement.

Broaden your view: Are Roth 401k Earnings Taxable

Contributions to a Roth 401(k) are made with after-tax dollars, which means you won't be able to deduct your contributions from your taxable income.

You'll have to pay taxes on withdrawals in retirement, but the money grows tax-free.

You can't withdraw earnings from a Roth 401(k) until you reach age 59 1/2 or have a qualifying event, such as a first-time home purchase or disability.

If you withdraw earnings before age 59 1/2 and don't have a qualifying event, you'll face a 10% penalty, in addition to income taxes.

Roth 401(k) accounts have required minimum distributions (RMDs) starting at age 72, which means you'll have to take annual withdrawals.

You can choose to take RMDs over your lifetime or over a set period, but you can't skip them altogether.

Choosing and Setting Up a Roth 401(k) is a crucial step in securing your financial future. To begin, you'll need to determine if your employer offers a Roth 401(k) plan, as not all companies do.

Check your employee benefits package or speak with HR to confirm availability. The good news is that many large corporations offer this option.

The contribution limits for a Roth 401(k) are higher than those of a traditional 401(k), with a maximum annual contribution of $19,500 in 2022. This allows you to save more for retirement.

You can contribute up to 100% of your income to a Roth 401(k), but your employer may match a portion of your contributions. Make sure to take advantage of any company match to maximize your savings.

The Roth 401(k) has no required minimum distributions (RMDs) during your lifetime, giving you more flexibility in retirement. This means you can keep the money in your account for as long as you want without having to take withdrawals.

For your interest: Company Match Roth 401k