What Is a Roth 401(k)?
Table of Contents
A Roth 401(k) is a type of retirement plan that may be offered by your employer. You contribute money from your paychecks directly to a Roth 401(k) to help save for retirement.
A Roth 401(k) is somewhat similar to a traditional 401(k), but the potential tax benefits are different.
Here’s what you need to know to understand how Roth 401(k)s work and to decide if it may be the right type of retirement account for you.
Key Points
• Contributions to a Roth 401(k) are made with after-tax dollars, generally allowing tax-free growth and tax-free withdrawals in retirement.
• Withdrawals are penalty-free if the account is open for at least five years and the individual is 59 1/2 or older.
• Employers can now match contributions directly into a Roth 401(k), rather than into a separate traditional 401(k) due to the SECURE Act 2.0.
• Catch-up contributions are available for those 50 and older, with higher limits in 2025 for individuals ages 60 to 63.
• As of 2024, required minimum distributions (RMDs) are no longer required for Roth 401(k)s.
Roth 401(k) Definition
A Roth 401(k) combines some of the features of a traditional 401(k) plan and a Roth IRA.
Like a traditional 401(k), a Roth 401(k) is an employer-sponsored retirement account. Your employer may offer to match some of your Roth 401(k) contributions.
Like a Roth IRA, contributions to a Roth 401(k) are made using after-tax dollars, which means income tax is paid upfront on the money you contribute.
History and Purpose of the Roth 401(k)
The Roth 401(k) was first offered in 2006 as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. Modeled after the Roth IRA, the Roth 401(k) was created to give employees an employer-sponsored investment savings plan that allowed them to save for retirement with after-tax dollars. Employees with a Roth 401(k) pay taxes on their contributions when they make them and withdraw their money tax-free in retirement, as long as the account has been funded for at least five years.
Originally, the Roth 401(k) was due to expire at the end of 2010, but the Pension Protection Act of 2006 made it permanent.
How a Roth 401(k) Works
Contributions to a Roth 401(k) are typically made directly and automatically from your paycheck. As mentioned above, your contributions are taxed at the time you contribute them, and you pay income taxes on them. In general, your money grows in the account tax-free and withdrawals in retirement are also tax-free, as long as the account has been open at least five years.
Differences Between a Roth 401(k) and a Traditional 401(k)
While a Roth 401(k) shares some similarities to a traditional 401(k), there are some differences between the two plans that you should be aware of. When it comes to 401(k) vs Roth 401(k), these are the differences:
• Contributions to a Roth 401(k) are made with after-tax dollars and you pay taxes on them upfront. With a traditional 401(k), your contributions are made with pre-tax dollars, and you pay taxes on them later.
• With a Roth 401(k), your take-home pay is a little less because you’re paying taxes on your contributions now. With a traditional 401(k), your contributions are taken before taxes.
• Your money generally grows tax-free in a Roth 401(k). And in retirement, you withdraw it tax-free, as long as the account is at least five years old and you are at least 59 ½. With a traditional 401(k), you pay taxes on your withdrawals in retirement at your ordinary income tax rate.
• You can start withdrawing your Roth 401(k) money at age 59 ½ without penalty or taxes. However, you must have had the account for at least five years. With a traditional 401(k), you can withdraw your money at age 59 ½. There is no 5-year rule for a traditional 401(k).
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How Employer Matching Works in a Roth 401(k)
Roth 401(k)s are typically matched by employers at the same rate as traditional 401(k)s plans. Your employer may match your Roth 401(k) contributions up to a certain amount or percentage, depending on the employer and the plan.
Historically, matching contributions for employees with a Roth 401(k) had to be put into a separate traditional 401(k). But because of the SECURE Act 2.0, this changed in 2023. Now employers have the option to make matching contributions directly into an employee’s Roth 401(k).
There are two main methods employers typically use to match employees’ Roth 401(k) contributions:
• Partial matching: This is when the employer matches part of an employee’s contribution, usually up to a particular percentage of their salary, such as $0.50 for every employee dollar contributed up to 6% of the employee’s salary.
• Dollar-for-dollar matching: In this case, the employer matches the employee’s contributions 100%, typically up to a certain percentage of the employee’s salary.
It’s important to note that not all employers offer Roth 401(k) matching. Those who do offer it may have certain stipulations. For example, employees may be required to contribute a specific minimum amount to their Roth 401(k) for the employer match to kick in. Check with your Roth 401(k) plan documents or your HR department to find out about your employer’s policy for matching contributions.
Roth 401(k) Contribution Limits
A Roth 401(k) and a traditional 401(k) share the same contribution limits. Both plans allow for the same catch-up contributions for those 50 and older (learn more about catch-up contributions below).
Here are the 2025 contribution limits for each type of plan.
| Roth 401(k) | Traditional 401(k) | |
|---|---|---|
| 2025 contribution limit for those under age 50) | $23,500 | $23,500 |
| 2025 standard catch-up contribution limit for individuals age 50 and up | $7,500 | $7,500 |
| 2025 contribution limit for those 50 and older with standard catch-up | $31,000 | $31,000 |
| 2025 enhanced catch-up contribution limit for those ages 60 to 63 due to SECURE 2.0 | $11,250 | $11,250 | 2025 contribution limit for those ages 60 to 63, per SECURE 2.0 | $34,750 | $34,750 |
| 2025 contribution limit for employee and employer contributions combined | $70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up |
$70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up |
Catch-Up Contributions for Those 50 and Older
Individuals who are age 50 and up have the opportunity to make catch-up contributions to a Roth 401(k). Catch-up contributions are additional money individuals can contribute to their Roth 401(k) beyond the standard yearly limit.
So, in 2025, if you contribute the standard annual limit of $23,500 to your Roth 401(k), you have the option of contributing an additional $7,500 for the year — for a total of $31,000, as long as you are age 50 or older. And if you are aged 60 to 63, in 2025, you can take advantage of enhanced SECURE 2.0 catch-up contributions of $11,250 instead of $7,500, for a total of $34,750.
Just like the standard contributions you make to a Roth 401(k), when you make catch-up contributions to your account, you also use after-tax dollars. That means you can withdraw the money tax-free in retirement.
Making catch-up contributions is one important factor to consider when you’re thinking about how to manage your 401(k), especially as you get closer to retirement.
Roth 401(k) Withdrawal Rules
A Roth 401(k) has certain withdrawal rules, including the 5-year rule. Under this rule, an individual can start taking tax-free and penalty-free withdrawals from a Roth 401(k) at age 59 ½ only when they’ve had the account for at least five years.
This means that if you open a Roth 401(k) at age 56, you can’t take tax- or penalty-free withdrawals of your earnings at age 59 ½ the way you can with a traditional 401(k). Instead, you’d have to wait until age 61, when your Roth 401(k) is five years old.
Early Withdrawal Rules
There are some exceptions to the withdrawal rules. For example, it’s possible to take early withdrawals — meaning withdrawals taken before age 59 ½ or from an account that’s less than five years old — from a Roth 401(k) without taxes and penalties, if an individual is disabled or passes away.
Other early withdrawals may be taken as well, but they are subject to taxes and a 10% penalty. However, you may not owe taxes and penalties on the entire amount, only on the earnings.
Here’s how it typically works: You can withdraw as much as you’ve contributed to a Roth 401(k) without paying taxes or penalties because your contributions were made with after-tax dollars. In other words, you’ve already paid taxes on them. Any earnings you withdraw, though, are subject to taxes and penalties, and you’ll owe tax proportional to your earnings.
For example, if you have $150,000 in a Roth 401(k) and $130,000 of that amount is contributions and $20,000 is earnings, those $20,0000 in earnings are taxable gains, and they represent 13.3% of the account. Therefore, if you took an early withdrawal of $30,000, you would owe taxes on 13.3% of the amount to account for the gains, which is $3,990.
💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA online, but you typically pay investment costs for the securities in your portfolio.
Roth 401(k) RMDs
Previously, individuals with a Roth 401(k) had to take required minimum distributions (RMDs) starting at age 73 (the age for RMDs was raised from 72 to 73 in 2023, thanks to SECURE 2.0). However, in 2024, as a stipulation of SECURE 2.0, RMDs were eliminated for Roth accounts in employer retirement plans.
By comparison, traditional 401(k)s still require taking RMDs starting at age 73.
Pros and Cons of a Roth 401(k)
A Roth 401(k) has advantages, but there are drawbacks to the plan as well. Here are some pros and cons to consider:
Pros
You can make tax-free withdrawals in retirement with a Roth 401(k).
This can be an advantage if you expect to be in a higher tax bracket when you retire, since you’ll pay taxes on your Roth 401(k) contributions upfront when you’re in a lower tax bracket. Your money grows tax-free in the account.
There are no longer RMDs for a Roth 401(k).
Because of the SECURE 2.0 Act, required minimum distributions are no longer required for Roth 401(k)s as of 2024. With a traditional 401(k), you must take RMDs starting at age 73.
Early withdrawals of contributions in a Roth 401(k) are not taxed.
Because you’ve already paid taxes on your contributions, you can withdraw those contributions early without paying a penalty or taxes. However, if you withdraw earnings before age 59 ½, you will be subject to taxes on them.
Cons
Your Roth 401(k) account must be open for at least five years for penalty-free withdrawals.
Otherwise you may be subject to taxes and a 10% penalty on any earnings you withdraw if the account is less than five years old. This is something to consider if you are an older investor.
A Roth 401(k) will reduce your paycheck now.
Your take home pay will be smaller because you pay taxes on your contributions to a Roth 401(k) upfront. This could be problematic if you have many financial obligations or you’re struggling to pay your bills.
Recommended: What Happens to Your 401(k) If You Leave Your Job?
Is a Roth 401(k) Right for You?
If you expect to be in a higher tax bracket when you retire, a Roth 401(k) may be right for you. It might make sense to pay taxes on the account now, while you are making less money and in a lower tax bracket.
However, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) might be a better choice since you’ll pay the taxes on withdrawals in retirement.
Your age can play a role as well. A Roth 401(k) might make sense for a younger investor, who is likely to be earning less now than they may be later in their careers. That’s something to keep in mind as you choose a retirement plan to help reach your future financial goals.
The Takeaway
Participating in a Roth 401(k) through your employer can help you save for retirement. Employees make contributions using after-tax dollars, and the money can be withdrawn tax-free in retirement. Your employer may match your contributions, which is essentially free money.
Of course, a Roth or traditional 401(k) isn’t the only way to save for retirement. Along with an employer-sponsored account, you might want to boost your savings with an IRA or a brokerage account, for instance. Whatever type of accounts you choose, the important thing is to have a retirement savings strategy in place to help make your post-working life as comfortable as possible.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
FAQ
How is a Roth 401(k) taken out of a paycheck?
Contributions to a Roth 401(k) are automatically deducted from your paycheck. Because contributions are made with after-tax dollars, meaning you pay taxes on them upfront, your paycheck will be lower.
What is the 5-year rule for a Roth 401(k)?
According to the 5-year rule for a Roth 401(k), the account must have been open for at least five years in order for an investor to take qualified withdrawals of their Roth 401(k) earnings at age 59 ½ without being subject to taxes and a 10% penalty.
What happens to a Roth 401(k) when you quit?
When you quit a job, you can either keep your Roth 401(k) with your former employer, transfer it to a new Roth 401(k) with your new employer, or roll it over into a Roth IRA.
There are some factors to consider when choosing which option to take. For instance, if you leave the plan with your former employer, you can no longer contribute to it. If you are able to transfer your Roth 401(k) to a plan offered by your new employer, your money will be folded into the new plan and you will choose from the investment options offered by that plan. If you roll over your Roth 401(k) into a Roth IRA, you will be in charge of choosing and making investments with your money.
Do I need to report a Roth 401(k) on my taxes?
Because your contributions to a Roth 401(k) are made with after tax dollars and aren’t considered tax deductible, you generally don’t need to report them on your taxes. And when you take qualified distributions from a Roth 401(k) they are not considered taxable income and do not need to be reported on your taxes. However, it’s best to consult with a tax professional about your particular situation.
Can you roll over a Roth 401(k) into a Roth IRA?
Yes, you can roll over a Roth 401(k) into a Roth IRA. You can do this, for example, if you leave your job. Rolling over your Roth 401(k) typically gives you a wider range of investment options to choose from. Roth IRA rollovers can be complicated, however, so you may want to consult a tax professional to make sure you don’t incur any unexpected tax situations.
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