What is a Roth 401(k)?

In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code.[1] Periodical employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers.

There are two types: traditional and Roth 401(k). For Roth accounts, contributions and withdrawals have no impact on income tax. For traditional accounts, contributions may be deducted from taxable income and withdrawals are added to taxable income. There are limits to contributions,[2] rules governing withdrawals and possible penalties.

The benefit of the Roth account is from tax-free capital gains. The net benefit of the traditional account is the sum of (1) a possible bonus (or penalty) from withdrawals at tax rates lower (or higher) than at contribution, and (2) the impact on qualification for other income-tested programs from contributions and withdrawals reducing and adding to taxable income, minus the consequences of capital gains being taxed at regular income rates.[3]

Roth 401(k) is a type of 401(k) where accounts, contributions, and withdrawals have no impact on income tax. The benefit of the Roth account is that the capital gains are tax-free.

In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their paychecks and may be matched by the employer.