What Is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement plan that lets you contribute after-tax dollars and withdraw the money tax-free in retirement. Unlike a traditional 401(k), where contributions reduce your current taxable income, a Roth 401(k) does not offer an upfront tax break. Instead, you pay taxes now and enjoy tax-free growth and withdrawals later.
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How a Roth 401(k) Works
You make contributions through payroll deductions, just like with a traditional 401(k). Your employer may also match contributions, and that match always goes into a traditional 401(k) sub-account, not the Roth portion. Your contributions and any employer match then invest in the plan's available funds, such as index funds, target-date funds, or mutual funds.
Because you have already paid taxes on your contributions, the money grows without creating a tax bill each year. When you leave your job or reach retirement age, you can withdraw from the Roth portion without owing federal income tax, as long as the account has been open for at least five years and you are age 59½ or older.
Roth 401(k) Contribution Limits
The IRS sets annual contribution limits. For 2024, the total elective deferral limit is $23,000, or $30,500 if you are age 50 or older. These limits apply across all your 401(k) accounts, meaning the combined amount you can put into traditional and Roth 401(k) accounts cannot exceed the cap.
Roth 401(k) vs. Traditional 401(k)
| Feature | Roth 401(k) | Traditional 401(k) |
|---|---|---|
| Tax treatment of contributions | After-tax | Pre-tax |
| Tax on withdrawals | Tax-free (qualified) | Taxable as ordinary income |
| Upfront tax deduction | No | Yes |
| Required minimum distributions | No (if withdrawn after 59½ and 5-year rule) | Yes, starting at age 73 |
Who Should Consider a Roth 401(k)
A Roth 401(k) can make sense if you expect to be in a higher tax bracket during retirement than you are now, or if you want tax diversification across your retirement accounts. It also avoids required minimum distributions during your lifetime, which can help with estate planning. If your employer offers a Roth 401(k) option, consider splitting contributions between Roth and traditional accounts to balance your current and future tax exposure.