How Do Roth 401(k) Plan Contributions Work?

Save After-Tax Dollars With a Roth 401(k)

Young couple discussing retirement options with an advisor

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Prior to 2006, people who were saving for retirement could use a traditional 401(k) plan or any number of savings accounts that weren't crafted with this target in mind. But since 2006, savers have had another option: the Roth 401(k). A Roth 401(k) is a retirement savings plan that lets you add after-tax dollars to a discrete account in a 401(k) plan, which is designated only for Roth contributions.

The idea behind this setup is that you can prepay your income taxes today and take tax-free withdrawals after you retire. Learn more about how Roth 401(k) accounts work to decide whether this tool might be a good fit for your investment goals.

Roth vs. Traditional 401(k) Accounts

The easiest way to understand how 401(k) accounts work is to compare them to traditional 401(k) accounts.

  • Availability: Roth 401(k) contributions have only been permitted since 2006. The traditional version has been around since 1978. The Roth account is an optional feature, and some employers have chosen not to offer it.
  • Contribution dollars: You can add money to a Roth 401(k) with after-tax dollars. Money that you put into a traditional 401(k) must come from pre-tax dollars.
  • Taxes on contributions: Roth 401(k) contributions don't lower your taxable income in the year you make them. Contributions to a traditional 401(k) reduce your taxable income and your overall tax bill in the year you make them, so they are easier to afford.
  • Taxes on withdrawals: For the most part you can take funds out of a Roth 401(k) in retirement without paying income taxes on the money. But in order to do so you must follow IRS rules. These include waiting until age 59½, and keeping your account open for at least five years. You'll have to pay income tax on your own contributions plus any earnings over the years because traditional 401(k) contributions aren't taxed up front.
  • Tax deferral: As with traditional accounts, you don’t have to pay taxes on the earnings on the money you add to a Roth 401(k) each year.

Employee vs. Employer Contributions

There are two types of contributions to a 401(k) account, one by employees and the other by employers.

  • Employee: You’re making “salary deferral” contributions (also known as employee contributions) when you direct part of your salary to a 401(k). You can choose whether you want to make traditional, Roth, or both types of contributions, up to the total annual limit.
  • Employer: Your employer might also decide to add money to the plan and help you build retirement savings. These are known as employer contributions, and they come in two types. Your employer may match your contributions and add the same amount to your 401(k) account that you do at each paycheck, up to a limit. Or they might have a profit-sharing system set up. If your employer chooses to offer employer-match, this money is most often from pre-tax contributions. They can't be then shifted into a Roth account. You'll have to pay tax on withdrawals from pre-tax accounts.

Roth 401(k) Contribution Limits

You can only add so much to a Roth account to gain the perks that come with it. The limits for Roth 401(k) contributions are the same as those for traditional 401(k) contributions. The maximum you can add to a 401(k) as salary deferral is $20,500 in 2022 (up from $19,500 in 2021,). You can make an extra $6,500 in catch-up contributions if you're age 50 or older, which brings your total limit up to $27,000 in 2022 (or $26,000 in 2021).


You can direct some or all of your paycheck to each option as long as you don't exceed your maximum contribution amount.

The total limit on 401(k) contributions including salary deferrals (but not catch-up contributions), employer contributions, non-elective contributions, and plan forfeitures is $61,000 in 2022 (up from $58,000 ). That figure rises to $67,500 in 2022 ($64,500 for 2021) with extra catch-up contributions if you're age 50 or older.

In-Plan Rollovers

If you have money in a pre-tax savings fund, you may be able to convert it to Roth money in your 401(k). This is called an in-plan rollover. You must pay tax on your pre-tax amount to do so. It’s often wise to fund the tax payment with outside assets instead of your pre-tax money, which could reduce the amount that ends up in your Roth account. In-plan rollovers are an optional plan feature that some employers choose to offer.


If you make a Roth 410(k) contribution, you are not able to then recharacterize it as a traditional pre-tax contribution.

Deciding Whether to Work With a Roth 401(k)

A Roth 401(k) presents another savings option, but this type of account may or may not work for you. Speak with a qualified tax advisor before you decide.

A Roth 401(k) account might be a good idea if you think that your income tax rates will rise in the future because you won't pay tax on the withdrawals. Your taxes might go up for at least two reasons. You might pay taxes at a higher rate, even if your income remains the same, if new tax laws result in increased tax rates. And a portion of your earnings might be subject to higher income tax rates if your income increases, even if laws remain unchanged.

The most common state of affairs is that you’ll be in a lower tax bracket after you retire. You won't be earning income from working at that time, and chances are that the money you get from Social Security or maybe a pension won't be enough to boost your income that high. A Roth could end up being the wrong move in this case because you’d pay taxes on the money during your highest earning years.

Make some informed guesses based on how you think your Roth accounts will work in the future, then live and budget to work with that outcome. You can diversify your savings by contributing to both traditional and Roth accounts if you’re not sure one way or the other. This way you’ll have the option to pull from whichever account works best for you at the time when you need funds.

Roth 401(k) vs. Roth IRA Accounts

Aggressive savers might want an extra savings vehicle to help grow their nest eggs faster, while those who don't need to save as much may want an alternative. The Roth IRA is one such option, and you'll have an easier time with a Roth IRA account if you know how Roth 401(k) accounts work because they have much in common.

Both Roth 401(k) plans and Roth IRAs allow for after-tax savings. They do still differ in key ways, such as:

  • Maximums: The Roth 401(k) has higher annual savings limits. The IRA maxes out at $6,000 in 2021 and 2022, or $7,000 for people 50 and over. By contributing to a Roth IRA and a 401(k), you can make the most of your after-tax savings.
  • Income limits: Your income must be below certain IRS limits to use a Roth IRA. You can only make Roth IRA contributions if you earn less than $144,000 as a single filer in 2022 (up from $140,000 in 2021) and $214,000 if you're married and filing jointly in 2022 (up from $208,000 in 2021). But those income levels don't disqualify you from making Roth 401(k) contributions.
  • Access: For the most part you can withdraw funds from a Roth IRA (but not distributions that include earnings on those funds) at any time without taxes or penalties. Check with your CPA before doing so. Any distributions might require that you take out a proportional share of pre-tax and after-tax money if you have traditional and Roth funds in your 401(k). This could result in income taxes and penalties if you withdraw funds early.
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