Roth 401(k)
An employer retirement plan funded with after-tax contributions that grows and withdraws tax-free.
What is Roth 401(k)?
A Roth 401(k) combines the high contribution limits of a traditional 401(k) with the tax-free growth structure of a Roth IRA. Contributions are made with after-tax dollars — there is no upfront tax deduction — but qualified withdrawals in retirement (after age 59½ and satisfying a five-year holding period) are completely tax-free, including all investment gains. For 2025, the combined traditional/Roth 401(k) contribution limit is $23,500 ($31,000 for age 50 and older with catch-up). Unlike a Roth IRA, there are no income limits on Roth 401(k) contributions. The key decision between traditional and Roth depends on whether the worker expects to be in a higher or lower tax bracket in retirement — Roth generally favors younger workers anticipating significant income growth.
Example
A 30-year-old earns $75,000 and contributes $10,000 to a Roth 401(k). She pays taxes on the full $75,000 now. Over 35 years at a 7% average annual return, that $10,000 grows to approximately $106,000. Because it's Roth, she withdraws the entire $106,000 tax-free in retirement. Had she contributed to a traditional 401(k), she would owe income tax on the full $106,000 withdrawal — potentially $25,000+ depending on her retirement tax bracket.
Source: IRS — Designated Roth Accounts Under a 401(k), 403(b), or 457(b) Plan