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What Is a Roth 401(k)?

Roth 401(k)s allow you to make payroll-deducted contributions with after-tax dollars. We explain how these plans work in this article.

When you think of employer-sponsored retirement plans, you likely think of the traditional 401(k). However, many employers also offer a Roth 401(k) option. This allows you to grow and, upon retirement, withdraw your funds tax-free, much like a Roth IRA.

About 89% of employers allow their employees to contribute to a Roth 401(k) plan. In this article, we’ll explain how these programs work and in what way they differ from a traditional 401(k). You’ll also learn who they’re most beneficial for, their pros and cons, and how they can fit into your overall retirement plan.

How Roth 401(k)s Work

A Roth 401(k) is an employer-sponsored defined contribution retirement plan. It combines elements of the Roth IRA and traditional 401(k), allowing you to contribute after-tax dollars and grow your earnings tax-free. Then, once you retire, you won’t be on the hook for any additional payments to the government.

However, unlike a Roth IRA, contributions to a Roth 401(k) are made via payroll deductions and employer matching. Additionally, no income limitations prevent you from making contributions, as with an IRA. As of 2024, employees can contribute a maximum of $23,000 annually, as well as an extra $7,500 for those who are 50 or older.

It’ll be up to you to invest and grow your earnings over time with compound interest. Typically, you’ll only be able to buy securities that your employer makes available to you through your plan. These often include:

Once you reach age 59.5, you’ll be able to withdraw funds without penalty (10% if you do so earlier). Because you contributed after-tax dollars, these distributions, including your earnings within the account, are completely tax-free. This is the primary benefit of the Roth 401(k) in comparison to its traditional counterpart.

In the past, Roth 401(k)s had required minimum distributions (RMDs) as soon as you turn 73 years of age and aren’t working. However, starting in 2024 and going forward, RMDs will no longer be required for anyone with this account.

Traditional vs. Roth 401(k)

Traditional and Roth 401(k)s operate very similarly. The major difference between the two is how they’re taxed. Understanding how they differ is crucial to help you decide which one is best for your needs.

Matt Willer, Managing Director at Phoenix Capital Markets, LLC, explains that a “Roth 401(k) contribution is post-tax, and a traditional one is pre-tax.” In this way, the former “will allow you the tax-sheltered earnings once the funds are invested but alleviate you from future taxes after the 5-year seasoning period is complete.” On the other hand, the latter “will provide you with a runway of pre-tax money contributions and tax-deferred growth, but you will pay taxes in the future on the withdrawals.”

Another difference between the two is that the Roth 401(k) will no longer have RMDs as of 2024. But, if you have a traditional account, you will still need to begin distributions no later than age 72.

Other than the differences above, contributions and the management of the account work very much the same for the two plans. Each is an employer-sponsored defined contribution plan that allows you to grow your funds with compound interest. However, as mentioned earlier, it’s up to you to invest the funds within the account.

Roth 401(k)Traditional 401(k)
Contributions$23,000 annually ($7,500 for those 50 or older) in 2024. Contributions made with after-tax dollars.$23,000 annually ($7,500 for those 50 or older) in 2024. Contributions made with pre-tax dollars.
TaxesWithdrawals are tax-freeWithdrawals are tax-deferred
Required distributionsNone as of 2024Distributions must begin no later than 72 years of age

Who Should Invest with One

It’s important for everyone to make use of retirement vehicles. That way, they can take advantage of compound interest and build wealth for life after work. However, in the case of a Roth 401(k), there are some instances where it may be more worthwhile than others.

Per Willer, whether or not you should opt for a Roth 401(k) “comes down to taxes.” In other words, your decision between this plan or a traditional plan “will be based on what provides the best net benefit.” He adds that “the calculation and underlying question is whether you are better off taking the tax hit today in the current period(s) of time or down the road when you withdraw.”

Using a Roth 401(k) can be smart if you plan on being in a higher tax bracket later in life. Otherwise, you’d end up being taxed according to your income level at that age. For example, consider a scenario where you continue racking up pay raises throughout your career. In this case, one of these plans makes sense.

On the other hand, you may consider investing in a traditional 401(k) if you’re looking for a tax deduction. Christian Putnam, CPA and founder of Auger CPA, points out that if you would like to “lower [your] taxable income in the current year, Roth contributions won’t provide for a deduction.” Instead, you should “contribute to a traditional 401(k)” because you’re able to deduct them.

Pros and Cons of Using a Roth 401(k)

Using a Roth 401(k) is a smart way to build wealth for retirement. They have high contribution limits and allow you to withdraw your funds tax-free. However, there are a couple of downsides you should consider. For instance, contributions to this type of plan are not tax-deductible. Below are the pros and cons of utilizing one of these plans:


  • Able to contribute $23,000 per year of after-tax dollars
  • Withdrawals are tax-free
  • Allows you to leverage compound interest and grow your money for retirement
  • No required minimum distributions (RMDs)


  • Contributions aren’t tax deductible
  • Not all employers match contributions

How It Fits into Your Retirement Plan

Your 401(k), whether it’s a Roth or a traditional plan, will likely be a key piece of your retirement plan. However, to live a comfortable life after your career ends, it’s commonplace to have several vehicles contributing to your income. In many cases, these are your social security, tax-advantaged savings accounts, and other sources, such as an annuity.

It’s also possible to open a Roth IRA on top of your Roth 401(k). Taylor Kovar, CFP and founder of Kovar Wealth Management, tells us that it’s “often beneficial enough to contribute to a Roth 401(k) to get any employer match, then consider a Roth IRA for additional savings.” This way, you’re taking advantage of your employer’s matches, as well as the vast investment options that an IRA affords you.

As you build your retirement plan, we recommend you speak with a financial advisor. More specifically, a financial planner, such as a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC), can help you chart a path toward a comfortable retirement. To find an expert near you, consider using a free matching tool, such as this one. After filling out a short quiz, it’ll present you with up to three vetted options near you.

Frequently Asked Questions

Can I have both a traditional and Roth 401(k)?

If your employer offers both plans, you can contribute to each of them. However, combined contributions to both must be below the annual maximum.

Can I roll a Roth 401(k) into a Roth IRA?

You will be able to roll your Roth 401(k) into a Roth IRA with no problem, provided you follow your plan’s rules. And, because your funds are already after-tax, you won’t be taxed on what you roll over.

If you plan to roll over a traditional 401(k) to a Roth IRA, you will be responsible for paying the taxes on the funds before you can do so. However, if you roll funds over to a traditional IRA, which is also tax-deferred, you won’t need to pay taxes yet.

Do employers match Roth 401(k)s?

Employers commonly match contributions to Roth 401(k)s. However, not all of them do this. You should be sure to read your plan’s details carefully and ask your employer any questions if you’re unsure about matching.

Is a Roth 401(k) pre-tax?

No, a Roth 401(k) utilizes after-tax dollars for contributions. On the other hand, a traditional 401(k) uses pre-tax dollars. This means that, once you withdraw funds, you must pay ordinary income taxes on your distributions.

Can I withdraw from my Roth 401(k) early?

If you withdraw funds from your Roth or traditional 401(k) before you’re 59.5 years old, you will incur a 10% penalty. However, you can do so early if you become disabled. A beneficiary may also do so if you pass away and they are under the withdrawal age.