What Is a Roth 401(k)?
As the name implies, Roth 401(k) plans combine features of 401(k) plans with those of a Roth IRA.1,2,3
With a Roth 401(k), contributions are made with after-tax dollars – there is no tax deduction on the front end – but qualifying withdrawals are not subject to income taxes. Any capital appreciation in the Roth 401(k) also is not subject to income taxes.
What to Choose?
For some, the choice between a Roth 401(k) and a traditional 401(k) comes down to determining whether the upfront tax break on the traditional 401(k) is likely to outweigh the back-end benefit of tax-free withdrawals from the Roth 401(k).
Often, this isn’t an “all-or-nothing” decision. Many employers allow contributions to be divided between a traditional 401(k) plan and a Roth 401(k) plan – up to overall contribution limits.
Considerations
One subtle but key consideration is that Roth 401(k) plans aren’t subject to income restrictions like Roth IRAs are. This can offer advantages to high-income individuals whose Roth IRA has been limited by these restrictions. (See accompanying table.)
| Traditional 401(k) | Roth 401(k) | Roth IRA | |
|---|---|---|---|
| Contributions | Contributions are made withpretaxdollars | Contributions are made withafter-taxdollars | Contributions are made withafter-taxdollars |
| Income Limits | No income limits to participate | No income limits to participate | For 2025, contribution limit is phased out between $236,000 and $246,000 (married, filing jointly), and between $150,000 and $165,000(single filers) |
| Maximum Elective Contribution* | Contributions are limited to $23,500 in 2025* $30,500 for those over age 50 $34,750 for those between the ages of 60-63 | Contributions are limited to $23,500 in 2025* $30,500 for those over age 50, $34,750 for those between the ages of 60-63 | Contributions are limited to $7,000 for 2025 $8,000 for those over age 50 |
| Taxation of Withdrawals | Qualifying withdrawals of contributions and earningsaresubject to income taxes | Qualifying withdrawals of contributions and earningsare notsubject to income taxes | Qualifying withdrawals of contributions and earningsare notsubject to income taxes |
| Required Distributions | In most cases, distributions must begin no later than age 73 | In most cases, distributions must begin no later than age 73 | There is no requirement to begin taking distributions while owner is alive |
* This is an aggregate limit by individual rather than by plan. The total of an individual’s aggregate contributions to his or her traditional and Roth 401(k) plans cannot exceed the deferral limit – $23,500 in 2025($31,000 for those over age 50 and $34,750 for those between the ages of 60 and 63). | |||
Source: IRS.gov, 2025
Roth 401k plans are subject to the same annual contribution limits as regular 401k plans – $23,500 for 2025; $31,000 for those over age 50. These are cumulative limits that apply to all accounts with a single employer; for example, an individual couldn’t save $23,500 in a traditional 401k and another $23,500 in a Roth 401k.4
Another factor to consider is that employer matches are often made with pretax dollars, just as they are with a traditional 401k plan. In a Roth 401k, however, these matching funds accumulate in a separate account, which will be taxed as ordinary income at withdrawal.
Setting money aside for retirement can be part of a sound personal financial strategy. Deciding whether to use a traditional 401k or a Roth 401k often involves reviewing a wide range of factors. If you are uncertain about what is the best choice for your situation, you should consider working with a qualified tax or financial professional, but here are some reasons to consider a Roth 401k:
1. Tax Diversification: Similar to how you diversify the type of assets in your portfolio to hedge against risk, it’s also smart to diversify the taxability of your investments to hedge against future increases in taxes. This is a strategy known as tax diversification and it accounts for the various tax treatments of the different accounts you will eventually withdraw from. Here is an example of how tax diversification can help:
Example: There are several tax brackets based on your income. A significant withdraw or higher income year can push you into a higher tax bracket. This is called "bracket creep." To avoid this in retirement, you can withdraw from your traditional or regular 401k up to the next marginal tax bracket. If you need to take out more, consider taking from the Roth 401k as qualified withdraws are income tax free. This prevents your income from being taxed in the next higher tax bracket.
2. No Required Minimum Distributions (RMDs): At some point you will have to withdraw money from your traditional or regular 401k. Not so with a Roth 401k. This means you can leave money in your account for longer and hopefully continue to grow.
3. Tax-free withdraws for heirs: What if you never use all of your 401k/IRA in retirement? The beneficiaries will have to pay taxes on their withdraws from a regular 401k. Not so with a qualified Roth 401k withdraw, those withdraws are income tax-free. This is especially beneficial if the kids are working and in a high tax bracket.
Cons to a Roth 401k
The biggest drawback to saving in a Roth 401k is you lose the up-front tax deduction. This could mean you pay more in taxes today. This could also mean your income may be pushed into a higher tax bracket. It's important to know your income and where you fall on the Federal and State income tax table before you make a decision.
Final Thoughts
Whether a Roth 401k or Regular makes sense for you is not an easy decision. There are several factors to consider. Some factors - like future tax rates - are not known. Still, I encourage my clients to consider a Roth 401k in two circumstances: 1. They are in a low tax bracket today and may be in a low tax bracket in retirement (usually younger clients) 2. Older clients with a significant amount already in a traditional or regular 401k. Those clients may benefit from some tax diversification in retirement as mentioned earlier.
In my experience in working with those already in retirement, I've seen firsthand how taxes are a drag - quite literally. Many account balances drain faster when they have to pay Federal and sometimes state income taxes on their withdraws. This is especially tricky in a year when the stock market is down, the account value drops, and the client has to pay taxes on top of that. Taxes are a cost and can be a drain on an account value, don't discount that. Keep in mind too, it's not all or nothing decision, in most cases you can save in both - regular and Roth 401k.
Please remember, this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax or financial professional before adjusting your retirement strategy to include a Roth 401(k).
Want to learn more? Email me at maloi@sfr1.com
1. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth 401(k) distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as a result of the owner’s death or disability. Employer matches are pretax and not distributed tax-free during retirement. Once you reach age 73, you must begin taking required minimum distributions.
2. In most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
3. Roth IRA contributions cannot be made by taxpayers with high incomes. In 2025, the income phaseout limit is $165,000 for single filers, $246,000 for married filing jointly. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as a result of the owner’s death or disability. The original Roth IRA owner is not required to take minimum annual withdrawals.
4. IRS.gov, 2025
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