What is a Roth 401(k)?

A Roth 401(k) is a retirement account that is sponsored by employers and funded by taxed income. It’s a combination of features present in Roth IRAs and traditional 401(k) plans.

Like a Roth IRA, Roth 401(k) contributions and earnings can be withdrawn tax-free in retirement.

This makes a Roth 401(k) an attractive retirement planning tool for people who believe their income and tax rate will be higher later in life than it is now.

The tax rules for a Roth 401(k) make it unique from its traditional 401(k) counterpart.

A Roth 401(k) is funded with after-tax dollars. In other words, taxes are taken out on the front end when you make a contribution, but money comes out tax-free in retirement.

Roth 401(k) plan contribution limits depend on your age.

For example, people 49 years old and younger can contribute as much as $7,000 per year to a Roth 401(k) for 2025.

Once you turn 50, the IRS allows you to bump up your contributions by an extra $1,000.

These are the same contribution limits as a traditional 401(k) plan.

In contrast, 2025 contribution limits for traditional and Roth IRAs are $7,000 a year for people under age 50 and an extra $1,000 catch-up contribution a year for people ages 50 and older.

Traditional 401(k)s allow you to start taking distributions at age 59 1/2. With a Roth 401(k), you can start withdrawing money at the same age — but you also must have owned your Roth account for at least five years.

The five-year rule applies even if you’ve reached age 59 1/2.

If you are at least age 59 1/2 and the account is at least five years old, you’re in the clear. You won’t face taxes or penalties for withdrawing money from your Roth account.

Roth 401(k)s also require you to start withdrawing money at age 72 (or age 73 if you turned 72 after Dec. 31, 2022). These are called required minimum distributions, or RMDs.

However, there are a couple of ways to delay or avoid these distributions.

You can delay your RMDs if you’re still working at the company that holds your Roth 401(k) account so long as you don’t own more than 5% of the business sponsoring your plan. RMDs would begin once you retire from that job.

Another option is rolling your Roth 401(k) balance into a Roth IRA. Roth IRAs don’t require RMDs while the account owner is alive, allowing you to preserve that money and pass it on to your heirs. After 2024, you don’t ever have to make RMDs for Roth IRAs, due to the SECURE 2.0 Act.

Tax treatment is the most significant difference between a traditional 401(k) and a Roth 401(k).

A traditional 401(k) is funded with pre-tax money. You add money to your account and don’t pay taxes on it until you start withdrawing those funds in retirement.

Contributing to a traditional 401(k) also reduces your yearly taxable income.

In contrast, Roth 401(k) contributions are taxed on the front end, so the money you withdraw in retirement is tax-free. But contributing to a Roth 401(k) won’t reduce your yearly tax bill.

For example, let’s say you earn $100,000 a year. If you save $10,000 to a traditional 401(k), it will lower your taxable income to $90,000 when you file your taxes next year.

But if you make the same $10,000 contribution to a Roth 401(k), your taxable income will still be $100,000.

That could take dollars out of your current spending budget and cost you more money on the front end.

Still, a Roth account may be more valuable in retirement — especially if you plan to make more money when you’re older.

Roth 401(k)s are often considered valuable to younger investors because they are usually in a lower income tax bracket.

Additionally, young people benefit from the up-front tax deduction feature of a traditional retirement account since it is less valuable now than the tax-free withdrawal of a Roth account down the road.

Both traditional and Roth 401(k) plans allow you to set up automatic payroll deductions with your employer.

Unlike IRAs, 401(k) plans are only offered through your employer. If your employer offers a Roth option, you’re eligible to sign up.

Roth 401(k) were introduced in 2006 and have become more common in recent years. Over the last five years, the number of plans offering a Roth 401(k) option increased 29 percent, according to a 2021 study by Fidelity.

In 2021, about 76% of workplace plans offered a Roth option. According to the Fidelity study, millennials are the generation most likely to contribute to a Roth 401(k).

If your employer’s plan allows it, you may be able to split your contributions between Roth and traditional accounts.

Using both accounts can provide tax diversification in your retirement investing strategy. You’ll be able to choose whether to pull money from a tax-free or a tax-deferred account each year, giving you more control and flexibility over your yearly tax bill when you’re older.

Your employer may even offer to match your Roth 401(k) contributions. But keep in mind that the company match won’t be deposited into your Roth account.

Instead, the match must be made to a traditional 401(k) account. You’ll owe income tax on the employer contributions and the investment earnings when you take money from the account.

Your employer may also allow you to roll your current 401(k) into a Roth 401(k).

According to Fidelity, 28% of workplace plans give employees the option to convert pre-tax money to a Roth account in 2021 — twice the number who offered this option in 2016.