Unlike a traditional 401k, the Roth 401k allows you to contribute after-tax money today, and when you withdraw in retirement, you'll pay no taxes on it.
However, there are important things you should know about this account, just like every other tax deferred account.
What is a Roth 401(k)
A Roth 401(k) is a retirement savings plan that combines the best of a 401(k) and Roth IRA. This plan was only created into law in 2006, and as such, it's been slow for many 401k providers to offer it.
A Roth 401(k) is great because the employee contributes after-tax dollars, and as such, doesn't pay tax on withdraw from the fund.
Note: It's important to remember that your employer's contributions will always still be pre-tax.
Contributions to a Roth 401(k)
Just like a regular 401(k), employees make contributions from their paychecks to the Roth 401(k). However, with a Roth 401(k), the contributions made are from after-tax dollars.
The maximum contribution to all 401(k)s (both traditional and Roth) cannot exceed $19,500 in 2021 if you are under 50, and $26,000 if over 50. Matching funds from an employers are not included in this cap.
The 401k contribution limit is here: 401k Contribution Limits.
Employees can contribute to both traditional and Roth 401(k)s as long as the limit above is not exceed and the employer offers both.
Employer Matching Contributions
One of the biggest benefits of 401(k)s is that employers can match contributions as an incentive to employees. In 2021, the maximum match for employers is $38,500 (to make a total contribution of $58,000).
However, if you have a Roth 401(k), and you get an employer match, it cannot go into your Roth 401(k) because it cannot receive the after-tax treatment.
Instead, any employer matches must be deposited in to a pre-tax traditional 401(k).
Basically, when you open a Roth 401k, you're getting two accounts - a pre-tax account and an after-tax account. Your 401k provider should be tracking these balances separately.
Withdraws and Transfers
Just like I mentioned in a Roth IRA is Not That Hard To Understand, there are some restrictions on withdraws and transfers, but they aren't that complicated.
First, withdraws. Earnings on Roth 401(k)s will be tax free as long as the distribution is made at least 5 years after the first Roth 401(k) contribution and the attainment of the current retirement age of 59 1/2.
Note: There are some exceptions to withdrawing money early. Check out this guide to 401k penalty-free early withdrawal rules.
As for contributions, you cannot withdraw them penalty-free like you can with a Roth IRA. Once you make a contribution to a Roth 401(k), it is irrevocable.
You can roll your Roth 401(k) into a Roth IRA upon termination of employment.
Finally, unlike a regular Roth IRA, you must take required minimum distributions on a Roth 401(k) at age 70 1/2, just like a regular 401(k).
Related: Where To Open a Roth IRA
Roth Solo 401k
If you're self-employed or a small business owner, you can also create a Solo Roth 401k. We're huge fans of the Solo 401k because it allows you to save much more for retirement than other self-employed retirement savings vehicles.
With a Roth Solo 401k, it's important to remember that you are both the employer and employee. As such, when you create your Roth Solo 401k, you'll be opening two accounts - a pre-tax and an after-tax account. You'll have to track both the Roth and Pre-Tax contributions and balances separately.
Only the employee-side of the contributions are allowed to be Roth. The employer-side (or profit sharing portion), must be pre-tax. However, you get to deduct that contributions from your taxes.
Check out our guide to the Best Solo 401k Providers here to find a provider that allows a Roth Solo 401k.
If you have access to a Roth 401(k), it is a great way to save for retirement. There are a few special circumstances involved, but they aren't that hard to understand. Your money can grow and be withdrawn tax-free, which is great!
If you want a full breakdown, check out this guide: Roth 401k vs. Traditional 401k.
Readers: do you have a Roth 401(k)? Do you wish your company offered one? What are your thoughts?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.