Roth 401(k)
A 401(k) variant funded with after-tax dollars. Investments grow tax-free and qualified withdrawals in retirement are tax-free, combining the high contribution limits of a 401(k) with the Roth tax treatment.
What is a Roth 401(k)?
A Roth 401(k) is an employer-sponsored retirement account that works like a regular 401(k) except contributions are made with after-tax dollars. All qualified withdrawals, including decades of investment gains, are tax-free.
Key features
- After-tax contributions: no current-year tax deduction, but the money grows tax-free
- Same high limits as a regular 401(k): much higher than IRA contribution limits
- No income cap: unlike a Roth IRA, high earners can contribute
- Employer match goes to a pre-tax account: the match itself grows tax-deferred and is taxed on withdrawal, even if your own contributions are Roth
- Tax-free qualified withdrawals: after age 59½ and 5-year holding period, all the money including earnings comes out tax-free
Roth 401(k) vs. Roth IRA
- Contribution limit: Roth 401(k) limits are several times higher
- Income cap: Roth IRA has one, Roth 401(k) does not
- Investment choices: Roth IRA lets you pick any stock or fund at your broker; Roth 401(k) is limited to your employer's plan menu
- Withdrawal flexibility: Roth IRA contributions can be withdrawn anytime; Roth 401(k) is locked up until 59½ like any other 401(k)
If your employer offers both Traditional and Roth 401(k), many advisors suggest splitting contributions so you have a mix of tax-free and tax-deferred money in retirement.