Roth 401(k)

Roth 401(k)

What is a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement plan funded with after-tax payroll contributions. You pay income tax on contributions in the year they’re made, and qualified withdrawals in retirement are tax free (both contributions and earnings), provided certain rules are met.

How it works

• Available only through an employer — you cannot open a Roth 401(k) on your own.
• Contributions are taken from your paycheck after income tax is withheld and are invested in the plan’s investment options.
• Employers may match contributions, but employer contributions are subject to their own tax treatment and limits.
• Unlike a traditional 401(k), Roth 401(k) contributions do not reduce your taxable income today; instead they give the potential for tax-free distributions in retirement.

Contribution limits (2025)

• Employee contribution limit: $23,500.
• Catch-up contribution (age 50+): additional $7,500.
• No income limit to participate in a Roth 401(k).
• You cannot contribute more than your taxable compensation for the year.
• Combined employer + employee contribution limit (2025): $70,000 (or $77,500 including catch-up contributions).
• Note: Limits are adjusted annually for inflation; some plans allow larger catch-ups for certain age groups (e.g., ages 60–63).

Withdrawals and required minimum distributions (RMDs)

Qualified distributions are tax free if:
* The account has been held at least five years, and
* The distribution occurs after age 59½, or due to disability or the account owner’s death.

RMD rules update:
* For 2024 and later, required minimum distributions are generally no longer required from designated Roth accounts in employer plans. (RMDs may still have been required for distributions tied to earlier required beginning dates; check current IRS guidance.)

Penalties:
* Early or nonqualified withdrawals (before meeting the five-year rule and/or before age 59½) can trigger income taxes on earnings and possible penalties.
* Penalties also apply if you fail to take required distributions when they apply. The IRS reduced the missed-RMD penalty (previously 50%); the current penalty and correction provisions should be checked against the latest IRS guidance.

Advantages

• Tax-free growth and tax-free retirement withdrawals if distribution rules are met.
• Particularly beneficial if you expect to be in a higher tax bracket in retirement.
• No income limits to participate (unlike Roth IRAs).

Disadvantages

• No upfront tax deduction — contributions are made with after-tax dollars, reducing current take-home pay compared with a traditional 401(k).
• Investment losses are possible (market risk).
• Employer matching contributions, if any, are subject to separate tax rules and limits.

How it compares to other retirement accounts

• Traditional 401(k): Contributions are pretax and reduce taxable income now; withdrawals are taxed in retirement. May be better if you expect a lower tax rate in retirement or need the current-year tax break.
• Roth IRA: Also offers tax-free withdrawals, but IRAs have lower annual contribution limits and income-based eligibility for Roth IRAs. Roth IRAs generally do not have RMDs, while Roth 401(k)s historically did (see RMD updates).
• 403(b): Similar rules and limits to 401(k) plans but used by employees of schools, nonprofits and certain public employers.

When a Roth 401(k) may be a good choice

• You expect your retirement tax rate to be equal to or higher than your current tax rate.
• You want tax diversification (a mix of taxable, tax-deferred, and tax-free accounts).
• You prefer to pay taxes now in exchange for tax-free withdrawals later.

Risks and considerations

• Market risk — investments can lose value.
• Possible taxes and penalties for early or nonqualified withdrawals.
• Plan rules (investment options, matching, loan provisions) vary by employer; review your plan documents.

Bottom line

A Roth 401(k) lets employees invest after-tax dollars today for the benefit of tax-free withdrawals in retirement, subject to holding-period and age requirements. It’s a useful tool for tax diversification and for savers who expect higher taxes in the future, but it reduces current take-home pay compared with pretax contributions. Review your tax situation, retirement timeline, and employer plan features when deciding between Roth and traditional options.