Need to Know: What is a Roth 401(k)?

A Roth 401(k) is a savings vehicle for those who expect their marginal tax rate be higher in the future or want tax diversification to optimize withdrawals during retirement. Employees pay taxes income, or distribution of those dollars or their contributions today and then never have to worry about paying taxes on the growth, income, or distribution of those dollars.

A designated Roth account is a separate account within a company's retirement savings plan, i.e., 401(k). Employees can contribute to the Roth account through payroll deduction and receive identical tax treatment as a Roth IRA but benefit from higher contribution limits and no income limit.

Retirement account types and asset location

There are three main types of retirement accounts investors can choose to save in: taxable, tax-deferred, and tax-exempt. Each differs in terms of its flexibility and tax status.

	Taxable	Tax-deferred	Tax-exempt
Account Example	Brokerage Account	IRA401(k)	Roth IRARoth 401(k)
Contributions	Taxable	Tax-Deductible	Taxable
Ongoing taxes on interest, dividends, and capital gains	Yes	No	No
Distributions	Taxable (not mandated)	Taxable (mandated required minimum distributions)	Tax-exempt (not mandated)
Investment Options	High	IRA – High 401(k) – Low	Roth IRA – High Roth 401(k) – Low

Because each account has a different tax treatment, there's an opportunity to tailor the asset classes and investment vehicles in these accounts to optimize for after-tax return. While asset allocation refers to the mix of stocks, bonds, and other assets in a portfolio, asset location is about ensuring each account holds the most efficient asset.

Smart asset location strategies can help reduce a client's tax bill. For example, a corporate bond's interest held in a taxable account will be taxed at the client's ordinary income rate, up to 37% in 2025. That same bond held in a tax-deferred IRA would not be subject to taxes on the interest but would be taxed when withdrawn from the account.

Roth 401(k) vs. Roth IRA: What's the difference?

	Roth 401(k)	Roth IRA
Required minimum distributions	None while the owner is alive	None while the owner is alive
Investment options	Low – one to two dozen. Limited by the investment options offered by the company’s plan, typically stocks, bonds, and target-date mutual funds	High – thousands. Open architecture that includes individual stocks, bonds, ETFs, and mutual funds offered through a brokerage

Roth 401(k) stats

The Plan Sponsor Council of America estimates 93% of 401(k) plans offer a designated Roth account. While 21% of plan participants currently contribute to their Roth 401(k), next year certain "catch-up" contributions will be required to go into a Roth 401(k)

New SECURE Act 2.0 provision effective 2026

If you earned more than $145,000 in the previous calendar year and are age 50 years or older, catch-up contributions to a workplace plan must be made into a Roth 401(k) with after-tax dollars.