Should You Consider a Roth 401(k)?

Many companies now offer employer-sponsored Roth 401(k) options alongside traditional 401(k) plans, giving employees another way to save for retirement. What's the difference between the two plans? And should you consider contributing to a Roth 401(k)?

Here, we'll take a look at how Roth 401(k) plans stack up against their traditional counterparts and discuss what to consider before potentially contributing to one.

Most people are familiar with how traditional 401(k) retirement plans work: An employee contributes pre-tax dollars and chooses from a variety of investment options. Then, contributions and potential earnings grow tax-deferred until they're withdrawn, usually in retirement. With a Roth 401(k), however, the IRS takes its cut first. You make Roth 401(k) contributions with money that has already been taxed—just as you would with a Roth individual retirement account (IRA). Any earnings then grow tax free, and you pay no federal taxes when you start taking qualified withdrawals in retirement. (Individuals must have the Roth 401(k) account established for five years and be over the age of 59½ for tax-free withdrawals.)

Another difference is that if you withdraw money from a traditional 401(k) plan before you turn 59½, you pay taxes and potentially owe a 10% penalty on the entire distribution. (Individuals separating from service in the year they turn 55 or after are exempt from the 10% penalty.) But, with a Roth 401(k), your non-qualified withdrawals are a pro-rata amount of your contributions and earnings, and while your contributions won't be taxed (since taxes were already paid on that money), you may potentially be subject to taxes and a 10% penalty on funds that are considered earnings.¹

For traditional 401(k)s, you must generally begin taking required minimum distributions (RMDs) by April 1 of the year after you reach 73 (if you were born between 1951 and 1959) or by April 1 of the year after you reach 75 (if you were born in 1960 or later). And then in both cases, you have to take RMDs again before the end of that same year and in all future years. However, in contrast, there is no requirement to take RMDs from Roth 401(k)s. This allows assets in a Roth to have the opportunity to grow tax free, and if you pass down those Roth assets to your heirs, your heirs may not have to pay taxes on distributions either.² (Your heirs, however, may be subject to RMDs for inherited Roth assets but the rules vary depending on their relationship to you and if you were of RMD age when the heirs received the assets.)

But choosing a Roth 401(k) or a traditional 401(k) might not be an either-or decision. If your employer offers both, you can contribute to a Roth 401(k) and a traditional 401(k). However, keep in mind that your annual contribution limit would apply across both accounts and to all your employer sponsored plans. For example, you can't contribute the 2026 salary deferral limit of $24,500 (for those under 50) to each 401(k). But, you can divide the contribution among accounts, allowing you to, say, put $13,250 in a traditional 401(k) and $11,250 in the Roth 401(k), so long as the total contribution for all accounts is within the annual limit. The same goes for your total annual contribution limit ($72,000 for 2026 for those under the age of 50), which includes employer contributions.

• Taxes: You make pre-tax contributions and pay tax on withdrawals in retirement
• Salary deferral limits for 2023: $22,500 ($30,000 if you're age 50 or older)
• Total contribution limits for 2023 (includes salary deferral amount and employer matches): $66,000 ($73,500 if you're age 50 or older)
• RMDs
  • You must take RMDs starting at age 73

Now that you have a better understanding of a Roth 401(k), you might be wondering how it differs from a Roth IRA. Contributions to either account type are made with after-tax dollars, and you won't pay federal taxes on qualified distributions. The main differences between the two types of Roth accounts come down to annual contribution limits and income limits.

• Roth IRA contribution limits are much lower than those for Roth 401(k)s. Contributions to Roth IRAs are capped in 2026 at $7,500, or $8,600 if you're 50 or older.
• There are income limits on contributions to a Roth IRA. You can only make contributions to a Roth IRA in 2026 if your modified adjusted gross income (MAGI) is less than $168,000 for single filers or $252,000 for married couples filing jointly or a qualified widow(er).

In contrast, Roth 401(k)s don't have an income limit for contributions and, as the chart above shows, the contribution limits for Roth 401(k)s are much higher.

Finally, a Roth 401(k) is only available through an employer plan. But as long as you have earned income—and you meet the above MAGI requirements—you can open a Roth IRA as a part of your total retirement strategy.

Taxes are a key consideration when it comes to deciding on a Roth 401(k) over a traditional 401(k). If you're currently in a lower tax bracket but you expect to be in a higher tax bracket when you retire, then a Roth 401(k) could be a better deal than a traditional 401(k). Think of it this way: With a Roth 401(k), you can get your tax obligation out of the way now when your tax rate is potentially lower and then enjoy the tax-free earnings later in life when your taxes may be higher.

The same argument can apply to mid-career workers as well, especially those concerned about the prospects for higher tax rates in the future due to possible tax-law changes. After all, current tax rates are fairly low by historical standards. In 2026, the top federal income tax rate for married couples filing jointly is 37%, but it was 70% in 1981 and an eye-watering 91% back in 1963.

On the flip side, it may make less sense to contribute to a Roth 401(k) if you think your tax bracket will be lower in retirement than it is now. In this case, a traditional tax deferred contribution to a 401(k) could make more sense.

But even if you're in the higher tax bracket today and are likely to always be in the higher tax brackets, a Roth contribution could still make sense for you. Roth accounts can potentially be used to help smooth out your taxes during your later years when you transition from building wealth to tapping your accounts or they could be passed on to heirs to provide them with the tax-free distributions (as mentioned above).

If you're not sure where your tax rate, income, and spending will be in retirement—and it's a hard thing to predict—one potential approach might be to contribute to both a Roth 401(k) and a traditional 401(k). The combination will provide you with both taxable and tax-free withdrawal options in retirement. Building in the flexibility to use multiple accounts to manage taxes can be helpful, since you can't really know what future tax rates will look like.

For example, you could take RMDs from your traditional account and withdraw what you need beyond that amount from the Roth account federally tax free. That would mean you could withdraw a large chunk of money from a Roth 401(k) one year—say, to pay for a dream vacation—without having to worry about taking a big tax hit.

Besides the added flexibility of being able to manage your income tax liability, reducing your taxable income in retirement may be advantageous for a number of reasons, including lowering the amount you pay in Medicare premiums, paring down the tax rate on your Social Security benefits, and maximizing the availability of other income-based deductions. And, as always, be sure to weigh all your available options to ensure that adding an additional account type aligns with your retirement goals.