A Roth 401k combines the best features of a traditional 401k with the tax-free growth benefits of a Roth IRA. It is available through many employer retirement plans and offers a unique way to build tax-free retirement income. In this guide, we will explain how Roth 401k plans work and help you decide if it is right for you.
What is a Roth 401k?
A Roth 401k is a retirement savings option within your employer's 401k plan. Like a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and qualified withdrawals in retirement are completely tax-free. Unlike a Roth IRA, there are no income limits for contributions.
The simple version: A Roth 401k is like a Roth IRA inside your employer's retirement plan. You pay taxes on contributions now, but all growth and withdrawals are tax-free forever. Plus, you can contribute much more than a Roth IRA allows.
How a Roth 401k Works
- Elect Roth contributions: Choose to direct some or all of your 401k contributions to the Roth option
- Contribute after-tax: Your contributions come from your paycheck after income tax is withheld
- Employer match: Any employer match goes into a traditional (pre-tax) account, not Roth
- Tax-free growth: All investment gains grow without any tax
- Tax-free withdrawals: Qualified distributions in retirement are 100% tax-free
Roth 401k Contribution Limits 2026
Roth 401k contribution limits are the same as traditional 401k limits. The limit applies to your combined traditional and Roth contributions.
- Under age 50: $23,500 per year
- Age 50-59: $31,000 per year ($7,500 catch-up)
- Age 60-63: $34,750 per year ($11,250 super catch-up)
- Age 64 and over: $31,000 per year
Example: Splitting Contributions
Maria is 40 and wants to maximize her 401k. She can contribute $23,500 total.
- Option A: $23,500 all to Traditional 401k
- Option B: $23,500 all to Roth 401k
- Option C: $11,750 to Traditional + $11,750 to Roth (tax diversification)
Many financial experts recommend Option C for tax flexibility in retirement.
Roth 401k vs Traditional 401k
The fundamental difference is when you pay taxes on your money.
Traditional 401k
- Contribute pre-tax dollars
- Reduce your taxable income now
- Pay income tax on all withdrawals in retirement
- Better if you expect lower taxes in retirement
Roth 401k
- Contribute after-tax dollars
- No tax deduction now
- All growth and withdrawals are tax-free
- Better if you expect higher taxes in retirement
Important note: Employer matching contributions always go into a traditional (pre-tax) account, even if you choose Roth for your employee contributions. You will pay taxes on employer matches when you withdraw them.
Roth 401k vs Roth IRA
Both offer tax-free growth, but there are important differences:
Contribution Limits
- Roth 401k: $23,500 per year (2026)
- Roth IRA: $7,000 per year (2026)
Income Limits
- Roth 401k: No income limits - anyone can contribute
- Roth IRA: Income limits apply ($161,000 single, $240,000 married)
Required Minimum Distributions
- Roth 401k: RMDs required starting at age 73 (but can roll to Roth IRA to avoid)
- Roth IRA: No RMDs during your lifetime
Investment Options
- Roth 401k: Limited to your plan's investment menu
- Roth IRA: Nearly unlimited investment options
When to Choose Roth 401k
Consider contributing to a Roth 401k if:
- You are early in your career: Lower current tax rates make paying taxes now more attractive
- You expect higher future taxes: Tax rates could increase, or your income may grow
- You exceed Roth IRA income limits: Roth 401k has no income restrictions
- You want tax diversification: Having both pre-tax and Roth accounts provides flexibility
- You want to leave tax-free money to heirs: Roth accounts can be passed on tax-free
When Traditional 401k Might Be Better
Consider traditional 401k contributions if:
- You are in peak earning years: High income means high tax rates now
- You expect lower retirement income: You will be in a lower tax bracket
- You need the tax deduction: Reducing taxable income now is important
- You plan to retire in a low-tax state: State taxes may be lower in retirement
Example: Tax Rate Comparison
Tom is deciding between Traditional and Roth 401k contributions of $20,000.
- Current tax rate: 32%
- Expected retirement tax rate: 22%
Traditional 401k: Tom saves $6,400 in taxes now (32% of $20,000). He pays 22% tax on withdrawals later.
Roth 401k: Tom pays $6,400 more in taxes now. Withdrawals are tax-free later.
In this case, Traditional saves Tom money because his retirement rate is lower.
Roth 401k Withdrawal Rules
Understanding withdrawal rules is crucial for planning:
Qualified Distributions
To withdraw tax-free, you must meet two requirements:
- Age 59 1/2: You must be at least 59 1/2 years old
- 5-year rule: Five years must have passed since your first Roth 401k contribution
Non-Qualified Distributions
If you withdraw before meeting both requirements:
- Contributions come out tax-free (you already paid taxes on them)
- Earnings are subject to income tax and a 10% penalty
Required Minimum Distributions
Unlike Roth IRAs, Roth 401k accounts are subject to RMDs starting at age 73. However, you can avoid this by rolling your Roth 401k to a Roth IRA before RMDs begin.
Roth 401k Strategies
1. Split Your Contributions
Consider contributing to both Traditional and Roth 401k for tax diversification. This gives you flexibility to choose which accounts to draw from in retirement based on your tax situation.
2. Roll Over to Roth IRA at Retirement
When you leave your job, roll your Roth 401k to a Roth IRA to avoid RMDs and gain more investment options.
3. Maximize Contributions When Taxes Are Low
If you have a year with lower income (career change, sabbatical, startup), consider maximizing Roth contributions since your tax rate is temporarily low.
4. Consider State Taxes
If you currently live in a high-tax state but plan to retire in a no-income-tax state, traditional contributions may be better. If it is the reverse, Roth may win.
How to Start Contributing to a Roth 401k
- Check availability: Verify your employer offers a Roth 401k option
- Update your election: Log into your 401k administrator and select Roth contributions
- Choose your amount: Decide what percentage to contribute to Roth vs Traditional
- Select investments: Choose from your plan's investment options
- Review annually: Reassess your Roth vs Traditional mix each year
Track Your Roth 401k Growth
Pro Trader Dashboard helps you monitor your Roth 401k investments, track tax-free growth, and plan for a secure retirement.
Summary
A Roth 401k offers a powerful way to build tax-free retirement income through your employer's retirement plan. With higher contribution limits than a Roth IRA and no income restrictions, it is an excellent option for many workers. Consider splitting contributions between Traditional and Roth for maximum tax flexibility, and remember to roll over to a Roth IRA at retirement to avoid RMDs.
Want to learn more? Read our guides on 401k investing and Roth IRAs.