Roth 401(k)

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on January 04, 2023

A Roth 401(k) is an employer-sponsored investment savings account that is funded with after-tax dollars and provides a tax advantage to investors.

Investors in a Roth 401(k) enjoy tax-free growth and do not pay tax when funds are withdrawn in retirement.

Who Should Consider a Roth 401(k)?

Investors who think they will be in a higher tax bracket during their retirement years are in a position to consider a Roth 401(k), since they will be able to avoid paying the higher taxes upon withdrawal.

A traditional 401(k) is not taxed at deposit but is at withdrawal, making it the better option for those who expect to be in a lower tax bracket upon retirement.

Contribution Limitations

The contribution limits to a Roth 401(k) are dependent on the age of the investor.

The limits individuals are able to contribute in 2020 are $19,500 per year, with individuals over the age of 50 having the option to contribute an extra $6,500, known as a catch-up contribution, as a means to supplement any investment funds they may be lacking as they near retirement.

In order for withdrawals on any contribution to be free of tax, criteria has to be met to qualify the distribution.

The Roth 401(k) account has to have been held for at least five years, and the withdrawal must have been taken out on account of disability, when an account holder reaches the age of 59  ½ , or after the death of an account owner.

 

Roth 401(k) FAQs

What is a 401(k) plan?

A 401(k) plan is a retirement plan offered by an employer designed to help employees save for retirement.

What Are Roth IRA Contribution Limits 401(k) Plan

You are allowed to split contributions between a Roth IRA and 401(k) accounts, or any other combination of after-tax and pre-tax plans; however, your combined contributions cannot exceed $19,500 (or a maximum of $26,000 if you are eligible for catch up contributions).

What is the difference between a Roth 401(k) and traditional 401(k)?

With a Roth 401(k), taxes are paid as money is put into the retirement account. With a traditional 401(k), taxes are paid as money is taken out.

Are there other retirement savings plans other than a 401(k) plan?

Alternatives to 401(k) plans include traditional IRAs, Roth IRAs, pension plans (if your employer offers one), and 403(b) retirement plans for employees of non-profit organizations.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

Find Advisor Near You