Roth 401(k)

A Roth 401(k) — formally a designated Roth account within a 401(k) plan — lets employees direct part of their payroll deferral into an after-tax bucket instead of the traditional pre-tax one. The contribution itself doesn't reduce taxable income the way a traditional 401(k) contribution does, but qualified withdrawals in retirement, including decades of investment growth, come out completely free of federal income tax. It's the same 401(k) plan and the same contribution limit as the traditional option; the only difference is when the tax gets paid.

The core trade-off mirrors the choice between a traditional and Roth IRA — pay tax now or pay tax later — but a Roth 401(k) has two advantages a Roth IRA doesn't. First, there's no income limit: a high earner shut out of contributing directly to a Roth IRA can still contribute to a Roth 401(k) through work, regardless of how much they earn. Second, the contribution limit is the much higher 401(k) figure — $24,500 — rather than the IRA's $7,500, since Roth and traditional 401(k) contributions share a single combined limit rather than each getting their own.

A qualified distribution — one that comes out completely tax-free — needs two things to be true: the Roth 401(k) account must have been open at least five years (counted from the first Roth contribution, not reset by later contributions), and the participant must be at least 59 1/2, permanently disabled, or deceased. Withdraw before satisfying both, and the earnings portion of the withdrawal is generally taxable and can face the usual 10% early-withdrawal penalty, even though the contributions themselves were already taxed.

Two newer wrinkles matter for 2026. Since 2024, Roth 401(k) accounts no longer carry lifetime required minimum distributions, closing a long-standing gap between Roth 401(k)s and Roth IRAs (which never had RMDs). And starting in 2026, SECURE 2.0 requires that any catch-up contribution be made as Roth for participants whose FICA wages from that employer exceeded $150,000 in the prior year — effectively pushing some higher earners' catch-up dollars into the Roth bucket whether or not they'd otherwise have chosen it. Separately, some plans now allow employees to elect employer matching or nonelective contributions to be treated as Roth rather than pre-tax, an option Congress made available starting in 2023 — though not every plan has adopted it, so check your own plan before assuming it's available.

A hypothetical example: Marcus, 40, contributes $10,000 for the year to the Roth 401(k) option in his employer's plan, paying ordinary income tax on that $10,000 now since there's no deduction. By age 62, having opened the account well over five years earlier, that $10,000 — plus every dollar of growth along the way — has become $55,000. Because he's over 59 1/2 and the five-year rule is satisfied, he withdraws the entire $55,000 completely tax-free.

Compare that to his colleague Dana, who put the same $10,000 into the traditional (pre-tax) side of the same plan. She got a deduction worth roughly $2,200 that year (assuming a 22% marginal rate), but every dollar she eventually withdraws — the original $10,000 and all its growth — will be taxed as ordinary income in retirement.

Pros

• No income limit, unlike a Roth IRA — available to any employee whose plan offers it, regardless of pay.
• Qualified withdrawals, including decades of growth, are entirely tax-free.
• Shares the much higher 401(k) contribution limit rather than the IRA's lower one.
• No lifetime required minimum distributions since 2024.

Cons

• No upfront tax deduction, which means less take-home pay today compared with a traditional contribution of the same amount.
• Not every employer's 401(k) offers a Roth option.
• Withdrawing before the five-year clock and age 59 1/2 (absent disability or death) makes the earnings portion taxable and often penalized, even though contributions were already taxed.
• Beneficial mainly if your tax rate now is lower than you expect it to be in retirement — the opposite assumption favors traditional contributions instead.