Chapter 2 — Roth 401(k)

A Roth 401(k) — formally called a designated Roth account — is an optional feature that an employer may add to a regular 401(k) plan. It allows employees to elect to have some or all of their elective deferrals made on an after-tax basis, with qualified distributions received completely tax-free. This combines the high contribution limits of a 401(k) with the tax-free distribution feature of a Roth IRA.

The Roth 401(k) is particularly valuable for employees who expect to be in a higher tax bracket in retirement than they are today, or for those who want tax diversification across both pre-tax and after-tax retirement accounts. It is also the only way for high-income earners — who are phased out of the Roth IRA — to make Roth-style retirement contributions at the higher 401(k) contribution limits.

Roth 401(k) contributions are made with after-tax dollars — they are included in the employee’s taxable income in the year contributed and do not reduce current taxable income. However, unlike a Roth IRA, there are no income limits for Roth 401(k) participation. Any employee eligible for the plan may designate contributions as Roth, regardless of income level.

The elective deferral limit applies to the combined total of an employee’s traditional (pre-tax) and designated Roth contributions. For 2026:

• Combined traditional + Roth elective deferrals: $24,500
• Catch-up (age 50–59 and 64+): $8,000 additional
• Super catch-up (age 60–63, SECURE Act 2.0): $11,250 additional

An employee may split deferrals between traditional and Roth in any proportion — for example, $12,000 pre-tax and $12,500 Roth — as long as the combined total does not exceed $24,500.

When an employee makes Roth 401(k) contributions, the employer’s matching contributions are made on a pre-tax basis and deposited into a separate traditional (pre-tax) account — they are not added to the designated Roth account. Employees will pay ordinary income tax on the employer match and its earnings when withdrawn.

Under SECURE Act 2.0, employers may now optionally allow employees to elect that employer matching and nonelective contributions be made as designated Roth contributions (if the plan offers this feature). Such Roth employer contributions are taxable to the employee in the year made.

The plan must maintain a separate designated Roth account for each participant, tracking Roth contributions and earnings separately from pre-tax amounts. The five-year holding period for qualified distributions is measured from the first year a Roth contribution is made to the plan.

A distribution from a designated Roth account is tax-free and penalty-free if it is a qualified distribution. A distribution qualifies if both of the following conditions are met:

• the distribution occurs at least five taxable years after the first year a Roth contribution was made to the plan, and
• the distribution is made:
  • on or after the employee reaches age 59½,
  • upon the employee’s death, or
  • on account of the employee’s disability.

If a distribution does not meet both requirements, it is a non-qualified distribution. The tax treatment of a non-qualified distribution from a Roth 401(k) is determined by the exclusion ratio — the proportion of contributions (after-tax basis) to total account value. The earnings portion of a non-qualified distribution is taxable as ordinary income and subject to the 10% premature distribution penalty if the employee is under age 59½ (unless another exception applies).

A distribution from a designated Roth 401(k) account may be rolled over tax-free to a Roth IRA or to another employer’s designated Roth 401(k) account. Rolling over to a Roth IRA is often advantageous because Roth IRAs have no RMD requirements during the owner’s lifetime.

The five-year holding period for the Roth IRA begins from the first year a contribution was made to any Roth IRA — it does not carry over from the Roth 401(k). Employees who roll over should be aware that if they have never had a Roth IRA, a new five-year clock begins at rollover.

Prior to 2024, designated Roth accounts in 401(k) plans were subject to required minimum distributions (RMDs) during the owner’s lifetime — unlike Roth IRAs, which have no lifetime RMD requirement. SECURE Act 2.0 eliminated this disparity. Beginning in 2024, Roth 401(k) accounts are no longer subject to RMDs during the account holder’s lifetime, bringing them in line with Roth IRA treatment.

Employees who were already taking RMDs from their Roth 401(k) may stop doing so. If preferred, they may roll the account to a Roth IRA to avoid any future RMD complications upon death.

Beginning in 2026, employees whose prior-year FICA wages from the employer exceeded $150,000 must make all catch-up contributions as designated Roth contributions — even if they would otherwise prefer to make pre-tax catch-up contributions. This rule applies to 401(k), 403(b), and governmental 457(b) plans that offer a Roth option.

Employers may now give employees the option to elect that employer matching and nonelective contributions be treated as designated Roth contributions. If elected, the employer contribution is taxable to the employee in the year made. These Roth employer contributions must be fully vested immediately when designated as Roth.

The Roth 401(k) and Roth IRA share the same core feature — after-tax contributions with tax-free qualified distributions — but differ in several important ways: