What Is a Roth 401(k)?

A Roth 401(k) lets business owners and employees save after-tax money in their retirement account, up to the annual contribution limit. It works as an added feature to a standard 401(k) that lets you choose Roth, pre-tax, or both contribution types. Qualified withdrawals made in retirement are tax-free, which can be valuable if you expect to be in a higher tax bracket later.

Key Takeaways:

• Roth 401(k)s allow after-tax contributions that can be withdrawn tax-free in retirement, earnings and all.
• Roth 401(k)s have no income limits, unlike Roth IRAs.
• Employees can split contributions between Roth (after-tax) and Traditional (pre-tax) 401(k) options.
• Roth 401(k)s can be ideal for savers who expect to be in the same or higher tax brackets in retirement (thus allowing them to lock in current tax rates).

Learn how ShareBuilder 401k can support you and your business with a Roth 401(k).

How Does a Roth 401(k) Work?

A Roth 401(k) lets employees contribute after-tax dollars to their workplace retirement plan. Because income taxes are already paid at the time of contribution, future investments made with this money can then grow tax-free over time. This can be a smart way to manage your taxes if you expect your tax rate to increase as you age.

Roth 401(k)s are not a separate 401(k) account, but an added option within a 401(k) plan that might give you more tax-management flexibility in retirement.

In addition, new regulations allow employers to choose to offer matching contributions as either Traditional (pre-tax) or Roth (after-tax) contributions. This gives employees even more flexibility in their retirement plans. However, make sure to double-check that your plan administrator supports this option.

Traditional 401(k)s and Roth 401(k)s can both provide:

• Automatic payroll deductions

• Access to a diversified investment lineup

• Dollar-cost averaging through regular contributions

As with any 401(k), withdrawing funds before age 59 ½ may result in taxes and a 10% early withdrawal penalty unless an IRS exception applies. For Roth 401(k)s, qualified withdrawals require that the participant meet age requirements and that the account has been held for at least five years.

Pre-tax vs Roth

The choice between a Roth 401(k) and a Traditional 401(k) comes down to when you want to pay taxes.

Traditional (pre-tax) 401(k):

• Contributions reduce taxable income today

• Taxes are paid on withdrawals in retirement

• Often used by those who expect a lower tax rate later

Roth 401(k):

• Contributions are made after-tax

• Qualified withdrawals are tax-free, including earnings

• Often used by those who expect their tax rate to stay the same or increase in retirement

Roth 401(k) versus Traditional (Pre-tax) 401(k)

Many savers choose to contribute to both, creating tax flexibility in retirement. However, it is always a good idea to consult with a tax advisor to determine the best approach for you.

Roth 401(k) vs Roth IRA

Both Roth 401(k)s and Roth IRAs offer tax-free withdrawals in retirement, but there are key differences:

• Income limits: Roth IRAs have income restrictions; Roth 401(k)s do not.

• Contribution limits: Roth 401(k)s allow significantly higher annual contributions.

• Access: Roth IRAs are opened individually; Roth 401(k)s must be offered by an employer.

^{*In 2026, beginning at $153K, the amount you are allowed to contribute begins to decrease, hitting $0 at $168K for singles (range is $242K to $252K for married couples filing jointly}

Is a Roth 401(k) Right for You?

A Roth 401(k) may be a good fit if you:

• Expect your income and tax rate to rise over time

• Want tax-free income in retirement

• Do not qualify for a Roth IRA due to income limits

• Want to diversify how your retirement savings are taxed

A Roth 401(k) may be less optimal if you:

• Need the tax deduction today

• Expect to be in a significantly lower tax bracket in retirement

• Current cash flow is limited and need extra take-home pay now

If you’re considering a Roth 401(k), the team at ShareBuilder 401k can help you understand your options and decide what makes most sense for your business.

Roth 401(k) FAQs

Is a Roth 401(k) better than a Traditional 401(k)?

A Roth 401(k) isn’t inherently better than a Traditional (pre-tax) 401(k). The difference comes down to how and when your money is taxed. With a Roth 401(k), you pay taxes on contributions today and can take withdrawals tax-free in retirement. With a Traditional 401(k), you receive a tax break now, but withdrawals are taxed later. Which option is better depends on your current income, your expected tax situation in retirement, and your cash flow today. Consulting with a tax advisor can help reinforce you are on the right path.

How is a Roth 401(k) different from a pre-tax or Traditional 401(k)?

Traditional 401(k)s offer upfront tax savings through pre-tax contributions, which lowers your taxable income in the current year. Roth 401(k)s instead provide tax-free income in retirement via after-tax contributions.

Are there income limits for a Roth 401(k)?

No. Unlike Roth IRAs, Roth 401(k)s have no income restrictions.

Can I contribute to both Roth and Traditional 401(k)s?

Yes. You can split contributions between Roth and pre-tax options if total contributions stay within annual IRS contribution limits.

Is there a downside to a Roth 401(k)?

The main drawback of a Roth 401(k) is that you don’t receive a tax deduction on your income tax when you contribute. Because contributions are made after you pay taxes, your take-home pay will be slightly lower compared to contributing the same amount to a Traditional 401(k).

At what salary should you not use a Roth 401(k)?

There isn’t a specific salary level where a Roth 401(k) automatically doesn’t make sense. As a general rule, it’s more helpful to think about your current tax bracket and what you anticipate it to be in retirement. For example, if you are currently in a high tax bracket and expect your income and tax rate to be much lower later, Traditional 401(k) contributions may be more tax efficient.