Unlocking Retirement Savings: A Guide To Roth 401(K) Investing

A Roth 401(k) is a type of retirement plan where you contribute money that has already been taxed. This means that when you retire and make withdrawals, you won't pay taxes on your investment or any gains you've made, as long as you're over 59 ½ and have had the account for at least five years. Both types of accounts can be excellent ways to save for retirement, especially if your employer is offering a match.

Roth 401(k) contributions are after-tax

When you contribute to a Roth 401(k), the income you pay into the account has already been taxed. This means that when you retire and it's time to make withdrawals, you won't pay taxes on your investment or on any gains you've made, as long as you're over age 59 ½ and you've had the account for at least five years.

Both types of accounts can be excellent ways to save for retirement, especially if your employer is offering a match. You can contribute to both a Roth 401(k) and a separate Roth IRA, as long as you don’t exceed the income limits for the latter.

As of tax year 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). However, as compared to Roth IRAs, you'll be limited to the investments offered by your company's plan. Investment fees may also be higher.

Most people are familiar with how traditional 401(k) retirement plans work: An employee contributes pre-tax dollars and chooses from a variety of investment options. Then, contributions and potential earnings grow tax-deferred until they're withdrawn, usually in retirement.

Ultimately, contributing the maximum to either account each year yields the same pot of money in retirement. The traditional 401(k) balance would then be reduced by your tax rate in retirement, whereas the Roth 401(k) balance would remain whole.

Investment options are limited to employer's plan

If you're not well-versed in the investment world, it’s probably best to get the advice of a financial professional, such as a fee-only financial planner. When you contribute to a Roth 401(k), the income you pay into the account has already been taxed. This means when you retire and it's time to make withdrawals, you won't pay taxes on your investment or on any gains you've made, as long as you're over age 59 ½ and you've had the account for at least five years.

As of tax year 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). However, as compared to Roth IRAs, you'll be limited to the investments offered by your company's plan. Investment fees may also be higher.

With a Roth IRA, you may have more investment options than you have with a Roth 401(k). In addition, the rules for withdrawing funds are different. With a Roth IRA, you are generally able to withdraw your contributions (but not their earnings) at any time and pay zero taxes or penalties. That’s not the point of a retirement account, of course, but knowing that you could take out some money in an emergency might be reassuring.

Both Roth IRAs and Roth 401(k)s take after-tax contributions. You can contribute to both a Roth 401(k) and a separate Roth IRA, as long as you don’t exceed the income limits for the latter.

Most people are familiar with how traditional 401(k) retirement plans work: An employee contributes pre-tax dollars and chooses from a variety of investment options. Then, contributions and potential earnings grow tax-deferred until they're withdrawn, usually in retirement.

Tax-free withdrawals in retirement

When you contribute to a Roth 401(k), the income you pay into the account has already been taxed. This means that when you retire and it's time to make withdrawals, you won't pay taxes on your investment or on any gains you've made, as long as you're over age 59 ½ and you've had the account for at least five years.

Both types of accounts can be excellent ways to save for retirement, especially if your employer is offering a match. Most people are familiar with how traditional 401(k) retirement plans work: An employee contributes pre-tax dollars and chooses from a variety of investment options. Then, contributions and potential earnings grow tax-deferred until they're withdrawn, usually in retirement.

With a Roth 401(k), however, the IRS takes its cut first. You make Roth 401(k) contributions with money that has already been taxed—just as you would with a Roth individual retirement account (IRA). Any earnings then grow tax-free, and you pay no taxes when you start taking qualified withdrawals in retirement.

As of tax year 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). However, as compared to Roth IRAs, you'll be limited to the investments offered by your company's plan. Investment fees may also be higher.

Nevertheless, Roth 401(k)s can still be a great tool—especially for high-wage earners and/or those who anticipate higher taxes in retirement, Hayden said. You may choose to split your contributions between Roth and traditional 401(k)s, but your combined contributions can't exceed the limits. For 2025, those age 60 to 63 can make a catchup contribution of $11,250.

No required minimum distributions

Roth 401(k)s are no longer subject to required minimum distributions (RMDs) as of tax year 2024. This means that you don't have to take any minimum amount of money out of your Roth 401(k) each year as you would with a traditional 401(k).

Roth 401(k)s are similar to Roth IRAs, in that they take after-tax contributions and any earnings grow tax-free. You pay no taxes when you start taking qualified withdrawals in retirement, provided you are over 59 ½ and have had the account for at least five years.

With a Roth 401(k), the IRS takes its cut first. You make contributions with money that has already been taxed, just as you would with a Roth individual retirement account (IRA). Any earnings then grow tax-free, and you pay no taxes when you start taking qualified withdrawals in retirement.

Both types of accounts can be excellent ways to save for retirement, especially if your employer is offering a match. Contributing the maximum to either account each year yields the same pot of money in retirement. The traditional 401(k) balance would then be reduced by your tax rate in retirement, whereas the Roth 401(k) balance would remain whole.

You may choose to split your contributions between Roth and traditional 401(k)s, but your combined contributions can't exceed the limits. As of tax year 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). However, as compared to Roth IRAs, you'll be limited to the investments offered by your company's plan. Investment fees may also be higher.

Fees may be higher

When you invest in a Roth 401(k), investment fees may be higher than with a Roth IRA. This is because, with a Roth 401(k), you are limited to the investments offered by your company's plan.

As of tax year 2024, Roth 401(k)s are no longer subject to required minimum distributions (RMDs). However, as compared to Roth IRAs, you'll be limited to the investments offered by your company's plan.

If you're not well-versed in the investment world, it’s probably best to get the advice of a financial professional, such as a fee-only financial planner.

When you contribute to a Roth 401(k), the income you pay into the account has already been taxed. This means when you retire and it's time to make withdrawals, you won't pay taxes on your investment or on any gains you've made, as long as you're over age 59 ½ and you've had the account for at least five years.

With a Roth 401(k), the IRS takes its cut first. You make Roth 401(k) contributions with money that has already been taxed—just as you would with a Roth individual retirement account (IRA). Any earnings then grow tax-free, and you pay no taxes when you start taking qualified withdrawals in retirement.

Frequently asked questions