Roth 401(k)

What a Roth 401(k) is

The IRS calls it a designated Roth account. It is not a separate plan. It is a separate account inside your 401(k) that holds Roth deferrals and their earnings. Employees pay income tax on Roth deferrals now. A withdrawal is tax-free if it is “qualified”: the account has been open at least five tax years and the participant is 59½ or older, disabled or deceased.

Roth and pre-tax deferrals share one limit: $24,500 combined in 2026, plus catch-up contributions. Unlike a Roth IRA, a Roth 401(k) has no income cap, so high earners can use it.

For 2027 the combined limit rises to $25,500. (IRS Notice 2026-66)

Why it matters to employers

Offering Roth is a plan design choice, and it has become close to necessary. From 2026, higher-paid employees aged 50 or older must make catch-up contributions as Roth, which they cannot do if the plan has no Roth feature. A Roth option also has to be in place before a plan can offer in-plan Roth conversions or a mega backdoor Roth.

Payroll must withhold income tax on Roth deferrals and report them separately on Form W-2.

Example

An employee earning $90,000 defers 10% as Roth. $9,000 goes into the plan and her taxable wages stay at $90,000. If she had deferred pre-tax, her taxable wages would be $81,000 and withdrawals in retirement would be taxed.

Common mistakes

• Coding a Roth election as pre-tax in payroll, or the reverse. Fixing it means correcting both the plan records and the W-2.

• Telling employees the match will be Roth. An employer match is pre-tax unless the plan has adopted the SECURE 2.0 option that lets employees choose Roth for vested employer contributions.

• Forgetting the five-year clock when explaining withdrawals.

• Assuming Roth 401(k) balances face required minimum distributions during the owner’s lifetime. Since 2024 they do not.