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Account & Regulation

Roth 401(k)

A 401(k) variant funded with after-tax dollars. Investments grow tax-free and qualified withdrawals in retirement are tax-free, combining the high contribution limits of a 401(k) with the Roth tax treatment.

What is a Roth 401(k)?

A Roth 401(k) is an employer-sponsored retirement account that works like a regular 401(k) except contributions are made with after-tax dollars. All qualified withdrawals, including decades of investment gains, are tax-free.

Key features

  • After-tax contributions: no current-year tax deduction, but the money grows tax-free
  • Same high limits as a regular 401(k): much higher than IRA contribution limits
  • No income cap: unlike a Roth IRA, high earners can contribute
  • Employer match goes to a pre-tax account: the match itself grows tax-deferred and is taxed on withdrawal, even if your own contributions are Roth
  • Tax-free qualified withdrawals: after age 59½ and 5-year holding period, all the money including earnings comes out tax-free

Roth 401(k) vs. Roth IRA

  • Contribution limit: Roth 401(k) limits are several times higher
  • Income cap: Roth IRA has one, Roth 401(k) does not
  • Investment choices: Roth IRA lets you pick any stock or fund at your broker; Roth 401(k) is limited to your employer's plan menu
  • Withdrawal flexibility: Roth IRA contributions can be withdrawn anytime; Roth 401(k) is locked up until 59½ like any other 401(k)
If your employer offers both Traditional and Roth 401(k), many advisors suggest splitting contributions so you have a mix of tax-free and tax-deferred money in retirement.

Related Terms

401(k)

An employer-sponsored retirement plan where employees defer part of their salary into tax-advantaged investments. Contributions are pre-tax, growth is tax-deferred, and many employers offer a matching contribution.

403(b)

A retirement plan for employees of public schools, universities, churches, and certain nonprofits. Similar to a 401(k) in structure and contribution limits, with investments typically in annuities or mutual funds.

457(b)

A deferred compensation plan for state and local government employees and some nonprofits. Separate contribution limit from 401(k) and 403(b), and no early withdrawal penalty at separation of service.

Backdoor Roth

A two-step workaround that lets high earners get money into a Roth IRA despite the income limit: contribute non-deductibly to a Traditional IRA, then convert it to a Roth. Pro rata rule is the main trap.

HSA

A Health Savings Account: a triple-tax-advantaged account for medical expenses. Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free. Often used as a stealth retirement account.

Roth IRA

A retirement account funded with after-tax dollars. Investments grow tax-free, and qualified withdrawals in retirement are completely tax-free, including all earnings.