# What Is a Roth 401(k)?

> **Definition**
>
> A Roth 401(k) is an employer-sponsored retirement savings plan funded using after-tax dollars.

A Roth 401(k) is an employer-sponsored retirement savings account that is funded using after-tax dollars. This means that income tax is paid immediately on the earnings that the employee deducts from each paycheck and deposits into the account. As long as certain conditions are met—that is, you must be at least 59½ years old, and you must have had the account for at least five years—withdrawals from the account are [tax free](https://www.investopedia.com/terms/t/tax-free.asp) upon retirement.

This type of plan is different from a traditional [401(k)](https://www.investopedia.com/terms/1/401kplan.asp) plan, which is funded with pretax money. In this case, payroll deductions come out of the employee’s gross income and taxes are due when the money is withdrawn from the account.  

### Key Takeaways

*   A Roth 401(k) is a type of employer-sponsored retirement savings plan.
*   Contributions made to a Roth 401(k) are taxed, but earnings and withdrawals made during retirement are tax free.
*   Contribution limits are adjusted annually for inflation and are announced each year by the Internal Revenue Service (IRS).
*   Penalties apply if you make withdrawals before you turn 59½ or if you’ve had the account for less than five years.

![Roth 401(k)](https://www.investopedia.com/thmb/zSm-S58a88Wel2BTiA5_yMjFQVY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Roth401KFinal1-c6347099c80b487297949ac0ab857672.png)

*— Matthew Collins / Investopedia*

## How Roth 401(k)s Work

Investors have many options when it comes to saving for retirement. One of the most common ways to put money aside is through employer-sponsored plans like the [401(k)](https://www.investopedia.com/terms/1/401kplan.asp). Participation is voluntary and those who take part agree to automatic [payroll deductions](https://www.investopedia.com/articles/pf/08/payroll-deductions.asp) that are transferred into a special retirement account. Some employers even [match employee contributions](https://www.investopedia.com/articles/personal-finance/112315/how-401k-matching-works.asp) up to a certain amount.

There are [several varieties of 401(k)s](https://www.investopedia.com/roth-401k-vs-traditional-401k-8599695). The Roth 401(k) option became available at the beginning of 2006, while the traditional 401(k) has been around since 1978. Both were authorized by Congress as [tax-advantaged](https://www.investopedia.com/terms/t/tax-advantaged.asp) retirement plans to encourage employees to save for their retirement.

Their tax advantages are different:

*   A traditional 401(k) reduces the employee’s gross income for the year, giving them an instant tax break in addition to a [retirement savings](https://www.investopedia.com/retirement-savings-accounts-4689692) vehicle. The employee will owe regular [income tax](https://www.investopedia.com/terms/t/taxbracket.asp) on every withdrawal made during retirement.
*   The Roth 401(k) requires that the income tax be paid immediately, so the employee’s real [net income](https://www.investopedia.com/terms/n/netincome.asp) is reduced by the amount earmarked for savings. But no further taxes will be owed on withdrawals of either the contributions or the profits earned over the years.

### 77%

The number of plan sponsors that offer a Roth 401(k) option, as surveyed by the Transamerica Institute at the end of 2022.

## Roth 401(k) Contribution Limits

A Roth 401(k) is subject to contribution limits based on the individual’s age. These limits are adjusted annually for [inflation](https://www.investopedia.com/terms/i/inflation.asp) and released by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp).

The contribution limit for individuals is $23,500 in 2025. Individuals 50 and older can contribute an additional $7,500 as a [catch-up contribution](https://www.investopedia.com/terms/c/catchupcontribution.asp). In 2024, the contribution limit was $23,000, and the catch-up contribution was $7,500. Unlike other plans, there is no income limit to participate.  

Note that you cannot contribute more than your taxable income for the year.

## Roth 401(k) Withdrawal Rules

Withdrawals of any contributions and earnings are not taxed as long as the withdrawal is a [qualified distribution](https://www.investopedia.com/terms/q/qualifieddistribution.asp), which means certain criteria must be met. This means that:

*   The Roth 401(k) account must have been held for at least five years.
*   The withdrawal must have occurred because of a disability, on or after the death of an account owner, or when an account holder reaches at least age 59½.

The IRS has updated the rules for [required minimum distributions (RMDs)](https://www.investopedia.com/terms/r/requiredminimumdistribution.asp) for 2024:

> “\[F\]or 2024 and later years, RMDs are no longer required from [designated Roth accounts](https://www.investopedia.com/terms/d/designated-roth-account.asp). You must still take RMDs from designated Roth accounts for 2023, including those with a [required beginning date](https://www.investopedia.com/terms/r/requiredbeginningdate.asp) of April 1, 2024.”

Keep in mind that individuals can withdraw more than the RMD. But there is a penalty if you miss an RMD or if your withdrawal is less than outlined during a calendar year. Previously 50% of the value of the missed withdrawal, this penalty is now 25% of the missed withdrawal’s value. You can reduce the amount of the penalty to 10% if you fix the mistake before the date that the penalty is imposed, which is known as the correction window.

## Advantages and Disadvantages of Roth 401(k)s

A Roth 401(k) may have the greatest benefit for employees currently in a low tax bracket who expect to move into a higher one after they retire. Contributions made to a Roth 401(k) are taxed at the lower [tax rate](https://www.investopedia.com/terms/t/taxrate.asp). Distributions are tax free in retirement, making them the greatest single advantage. No matter how much the account grows over the years, that money is still exempt from income taxes after the account holder retires.

The downside is a little more immediate financial pain. Because contributions to a traditional 401(k) are not taxed immediately (but effectively reduce the amount of your gross income), the impact on your take-home pay is reduced and your tax break for the year is maximized. But there’s no such deal with a Roth 401(k). This means that you are out of pocket for (and taxed on) the deposits you make in the year you make them.

Pros

*   Helps people who believe they’ll be in a higher tax bracket later in life
    
*   Distributions are tax free during retirement  
    
*   Earnings grow tax free
    

Cons

*   Contributions are made using after-tax dollars
    
*   Contributions don’t reduce your taxable income
    

## Roth 401(k)s vs. Other Retirement Accounts

A Roth 401(k) is an employer-sponsored plan that helps people prepare for retirement. But it’s not the only option available to investors.

> **Important**
>
> A defined contribution plan like a 401(k) may not be sufficient to meet your retirement needs.

### 401(k) Plans

Like its Roth equivalent, the [traditional 401(k)](https://www.investopedia.com/articles/retirement/08/401k-info.asp) is an employer-sponsored plan. This means you can’t set one up on your own. Money is taken out of your paycheck through automatic deductions and transferred into a special account. The money is then invested in a series of [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp) that you choose.

The IRS sets limits on how much you can contribute to the plan each year. This figure is adjusted annually for inflation.

*   Employees below age 50 cannot contribute more than $23,500 in 2025. In 2024, it was $23,000.
*   Those 50 and older can make a catch-up contribution of $7,500 in 2024 and 2025.
*   Those age 60, 61, 62 and 63 can make a catch-up contribution of $11,250 in 2025.

Employers can also contribute to their employees’ plans, as long as the total contribution does not exceed the employee’s annual salary. The limit for employer and employee contributions together is capped at $70,000 in 2025, or $77,500 including the catch-up contribution. For 2024, those limits were $69,000 and $76,500, respectively.

This plan is a [defined contribution plan](https://www.investopedia.com/terms/d/definedcontributionplan.asp), which means your contributions determine the account balance and how well your account performs. Contributions are made using [pretax dollars](https://www.investopedia.com/terms/p/pretax-earnings.asp), reducing the income tax you pay. Withdrawals made during retirement are subject to income tax.  

### Individual Retirement Accounts (IRAs)

If you don’t have the option to invest in an employer-sponsored plan, you may want to consider an [individual retirement account (IRA)](https://www.investopedia.com/terms/i/ira.asp). This kind of account can be set up by anyone through a financial institution or investment firm, which means anyone who has earned income is entitled to one.

> **Important**
>
> Unlike a Roth 401(k), a Roth IRA is not subject to required minimum distributions.

You can invest in a variety of investments under an IRA, including [stocks](https://www.investopedia.com/terms/s/stock.asp), [bonds](https://www.investopedia.com/terms/b/bond.asp), [exchange-traded funds (ETFs)](https://www.investopedia.com/terms/e/etf.asp), mutual funds, and [real estate investment trusts (REITs)](https://www.investopedia.com/terms/r/reit.asp). Just like the 401(k), there are several types of IRA options available:

*   **Traditional IRA**: Contributions made to a traditional IRA are tax deductible, thereby decreasing your taxable income. Withdrawals made during retirement are taxed at your normal income tax rate. For 2025, you can only contribute up to $7,000 if you’re under 50. In 2024, it was up to $7,000. You can make an additional $1,000 catch-up contribution if you are 50 or older in both 2024 and 2025.
*   **Roth IRA**: Contributions made to a Roth IRA are made using after-tax dollars. This means you can’t use them to reduce your taxable income. The limits are the same as traditional IRAs. Any withdrawals you make during retirement are tax free. Roth IRAs don’t require you to take minimum distributions—or any at all. You can leave the money in your account if you choose to do so. You will be hit with a 10% [early withdrawal](https://www.investopedia.com/terms/e/earlywithdrawal.asp) penalty if you take money out before age 59½.

You can also choose a [Simplified Employee Pension (SEP) IRA](https://www.investopedia.com/terms/s/sep.asp) or a [Savings Incentive Match Plan for Employees (SIMPLE) IRA](https://www.investopedia.com/terms/s/simple-ira.asp) if you’re self-employed or work for a small business.

### 403(b) Plans

These plans are just like the 401(k) but are sponsored by employers for individuals who work in schools and other [tax-exempt](https://www.investopedia.com/terms/t/tax_exempt.asp) organizations. This includes teachers, professors, clergy people, government employees, and librarians.

403(b)s come with regular payroll deductions, and potentially additional contributions by the employer.

These plans have the same contribution limits as 401(k) plans. You can contribute a maximum of $23,500 in 2025, and $23,000 in 2024. People 50 and older can make an additional contribution of $7,500 in 2024 and in 2025. If you are age 60, 61, 62, or 63, you can contribute an additional $11,250 instead of $7,500.

## How Do Roth 401(k) Plans Work?

Roth 401(k) plans are only available through an employer, which means you can’t set one up yourself. Contributions are made using after-tax dollars through payroll deductions. The contributions grow tax free in your account. Withdrawals are also tax free as long as you’ve held the account for at least five years and you’re at least 59½.

## Is a Roth 401(k) Better than a Traditional 401(k)?

Your personal circumstances can help answer that question. For many people, the Roth 401(k) is a better deal because you only pay income taxes on your contributions. This allows your earnings to grow tax free and make withdrawals without paying income taxes. However, if you’re cash-strapped now, keep in mind that this option will be a heavier hit to your current annual income than a traditional 401(k).

Contributions to a traditional 401(k) are tax free, but you must pay taxes on your withdrawals. So if you expect to be in a lower tax bracket after retiring, [the immediate tax break of a traditional 401(k)](https://www.investopedia.com/experts-share-top-tax-savings-tips-8417232) will likely be more useful. However, it’s difficult to predict what income tax rates will be in the future.

## What Are the Criteria for Roth 401(k) Withdrawals?

A withdrawal is only considered a qualified distribution as long as you’ve held the account for at least five years and you’re 59½, unless you are disabled or the account holder dies.

## Can You Lose Money in a Roth 401(k)?

You can lose money in any investment if the market tanks. That said, most plans offer several funds, including [very low-risk options](https://www.investopedia.com/ask/answers/021615/what-safest-investment.asp) like government bond funds. You can mix and match choices to reach the level of risk you are comfortable taking.

You can also lose money in a Roth 401(k) if you break the rules and take early distributions. If you’re considering taking some money out early, check with the fund administrator to find out whether you might owe a tax penalty.

## The Bottom Line

Roth 401(k) plans allow a company’s employees to [start investing for retirement](https://www.investopedia.com/articles/personal-finance/090914/strategies-your-roth-401k.asp). Both the traditional 401(k) and the Roth version may offer an employer match. However, there is a big difference between the two: Whereas a traditional 401(k) is funded using after-tax dollars, translating to a tax break upfront, a Roth is funded using after-tax dollars, meaning that there are no income taxes when you take [distributions](https://www.investopedia.com/terms/d/distribution.asp) during retirement.

> **Article Sources**
>
> 1.  Investor.gov, U.S. Securities and Exchange Commission. “[Traditional and Roth 401(k) Plans](https://www.investor.gov/additional-resources/retirement-toolkit/employer-sponsored-plans/traditional-and-roth-401k-plans).”
>     
> 2.  U.S. Bureau of Labor Statistics. “[Employee Costs and Risks in 401(k) Plans](https://www.bls.gov/opub/mlr/cwc/employee-costs-and-risks-in-401k-plans.pdf),” Page 12.
>     
> 3.  U.S. Bureau of Labor Statistics. “[Another Retirement Savings Option: Roth 401(k) Plan](https://www.bls.gov/opub/mlr/cwc/another-retirement-savings-option-roth-401k-plan.pdf).”
>     
> 4.  U.S. Bureau of Labor Statistics. “[Beyond the Numbers](https://www.bls.gov/opub/btn/volume-5/pdf/defined-contribution-retirement-plans-who-has-them-and-what-do-they-cost.pdf),” Page 8.
>     
> 5.  Internal Revenue Service. “[Roth Comparison Chart](https://www.irs.gov/retirement-plans/roth-comparison-chart).”
>     
> 6.  Transamerica Institute. “[Stepping into the Future: Employers, Workers, and the Multigenerational Workforce](https://transamericainstitute.org/docs/default-source/research/stepping-into-the-future-employers-workers-multigenerational-workforce-report.pdf),” Page 22.
>     
> 7.  Internal Revenue Service. “[401(k) Limit Increases to $23,000 for 2024, IRA Limit Rises to $7,000](https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000).”
>     
> 8.  Internal Revenue Service. “[Retirement Plans FAQs on Designated Roth Accounts](https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts).”
>     
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>     
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>      
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>      
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>      
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