What is a Roth 401(k) and its contribution limits?

A Roth 401(k) is one of those retirement plans you don’t hear about very often. However, it is widely used by many companies across the country. Many people prefer a pre-tax 401(k) over a Roth account due to its upfront tax benefits.

The Roth 401(k) plan is sponsored by employers and contributions to the plan are made through payroll deductions just like the pre-tax 401(k) plan. The main difference between both accounts is that contributions to pre-tax 401(k) come from before-tax wages while the Roth 401(k) contributions come from after-tax wages.

For 2024, the contribution limits to a Roth 401(k) plan are $23,000 with an extra $7,500 catch-up contribution if you are 50 or older. These contributions are also the same for a pre-tax 401(k) plan.

Here is everything you need to know about Roth 401(k), its contribution limits, and eligibility requirements.

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What is a Roth 401(k)?

The Roth 401(k) is an employer-sponsored retirement plan that is a hybrid between a tax-deferred 401(k) and a Roth IRA. Some of the rules that govern the Roth 401(k) plan are similar to both 401(k) and Roth IRA. With a Roth 401(k) plan, you will make contributions from after-tax wages. However, the contributions are taken through payroll deduction just like a pre-tax 401(k) plan.

After-tax contributions to the Roth 401(k) plan are what makes this plan similar to the Roth IRA. Just like a Roth IRA, the Roth 401(k) plan does not come with upfront tax benefits. However, you grow the account without paying tax and most of your withdrawals are tax-free. The only portion of tax you pay when taking distribution is the portion from employer match and earnings they produced.

How does Roth 401(k) work?

Just like a pre-tax 401(k) plan, the Roth 401(k) plan is sponsored by employers. This plan allows participants to make contributions to the plan with after-tax wages. That means the account does not reduce your taxable income. With the Roth plan, you can grow your account without paying taxes. According to Investor.gov, you may not pay income tax on qualified distributions during retirement.

Some employers choose to make contributions to your Roth 401(k) plan. In this case, employer contributions will be treated like normal 401(k) contributions. For this reason, you may encounter tax liability on employer match and earnings from those contributions. Your contributions to the account and earnings from them, however, will be tax-free.

The Roth 401(k) requires you to start taking required minimum distributions(RMDs) when you turn 73.

Unlike Roth IRA where the eligibility requirement is based on modified AGI and filing status, there is no income limit to making contributions to a Roth 401(k) plan. Furthermore, contribution limits on the Roth 401(k) plan are the same as tax-deferred 401(k). This makes pre-tax 401(k) suitable for people who want to make larger after-tax contributions.

Contribution limits to Roth 401(k) in 2024

The contribution limit on Roth 401(k) in 2024 is $23,000. If you are 50 or older, you can contribute an extra $7,500 to catch up. That is if you are 50 or older, you can contribute up to $30,500 in 2024.

Contribution limits to Roth 401(k) in 2023

The Roth 401(k) contribution limits in 2024 are $22,500. If you are 50 or older, the maximum contribution to your Roth 401(k) plan will be $30,000 since you get an extra $7,500 catch-up contribution.

Roth 401(k) early withdrawal penalty

Although your contributions will come from after-tax money, you may end up paying an early withdrawal penalty on unqualified distributions from your Roth 401(k) plan. By default, the acceptable age you must reach before taking distributions is 59½. Any distributions you make before you turn 59½ will be considered early, and therefore, subject to a penalty and applicable taxes.

Any portion of your distribution that is not your contribution will be subjected to a 10% penalty when you make an early withdrawal from the Roth 401(k) plan. Additionally, you will pay applicable taxes on a non-contribution portion of your distribution if your account is not at least 5 years old.

What is a non-contribution part of your distribution?

A non-contribution portion of your distribution that will be taxed if the 5-year rule is violated includes the following.

Earnings from your contributions
Employer’s contributions, and
Returns from your employer’s contributions

Qualified distributions from a 401(k) plan are defined as:

Distributions you make from an account you had for at least five years, and
You are at least 59½.

Since your contributions come from after-tax money, you can withdraw them at any time without paying taxes or penalties.

Pre-tax 401(k) vs. Roth 401(k) for 2024

There are a lot of similarities and differences between a pre-tax 401(k) and a Roth 401(k) plan. Here is how a Roth 401(k) plan compares to a pre-tax 401(k) plan.

Roth 401(k) vs. pre-tax 401(k) plans in 2024

Features	pre-tax 401(k) plan	Roth 401(k) plan
Contribution limits in 2024	$23,000 or $30,500 if you are 50 or older	$23,000 or $30,500 if you are 50 or older
Sponsored by employer	yes	yes
Required minimum distributions (RMDs)	you must start taking RMDs when you turn 73	you must start taking RMDs when you turn 73
Reduce taxable income	yes	no
Pay tax on distributions	yes	May pay taxes. Qualified distributions from your contributions and earnings from them will be tax-free. However, any contribution from employer and their earnings will be taxed.
Early withdraw penalty	10% penalty and applicable taxes if the payout is made before you turn 59½ unless you meet IRS exceptions	10% penalty and applicable taxes (on ROI but not on the contributions) if you don’t meet the following requirements: (1) you violated the 5-year waiting period, and (2) you have not reached 59½ years old.
Employer can contribute	yes	yes
Vesting period	may apply	may apply

Roth IRA vs. Roth 401(k) in 2024

The Roth 401(k) is a hybrid between a pre-tax 401(k) and a Roth IRA. This means that some of the rules that apply to Roth IRAs also apply to the Roth 401(k). Here is how the Roth IRA compares to the Roth 401(k) plan.

Features	Roth IRA	Roth 401(k)
Contribution limits in 2024	$7,000 or $8,000 for age 50 or older	$23,000 or $30,500 for age 50 or older
Early withdrawal penalty	10% applies to the portion of distributions that can be included in gross income. Some IRS exceptions may apply.	10% applies to the portion of distributions that can be included in gross income such as (a) return on your contributions, (b) portion from employer contributions, and (c) earnings from employer contributions.
Required minimum distributions(RMDs)	no RMDs for the original account owner	must start taking RMDs at age 73
Age limit	no age limit as long as you are earned an income	no age limit as long as you earn an income
Taxes on distributions	qualified distributions are tax-free	qualified distributions are tax-free. You may pay taxes if you have an employer match. This is because employer contributions are treated as before-tax money. Therefore, you must pay tax on this portion and associated earnings during retirement.
Reduce taxable income	no	no
Sponsored by employer	no	yes
Can employer contribute	no	yes

Benefits of Roth 401(k) plan

The Roth 401(k) plan has unique retirement benefits and tax advantages. Even if you don’t get upfront benefits, the pros of this account outweigh its drawbacks. The following are key benefits of the Roth 401(k) plan you should know.

You might get an employer match
Unlike a Roth IRA, there is no income limit to making contributions to a Roth 401(k) plan
Contribution limits to a Roth 401(k) are higher than IRA limits. You can contribute up to $23,000 or $30,500 to a Roth 401(k) if you are 50 or older. For the Roth IRA, you can only contribute $7,000 or $8,000 if you are 50 or older.
You grow your account potentially tax-free
The plan increases your retirement savings fast due to higher contribution limits

Drawbacks of Roth 401(k) plan

while the Roth 401(k) offers a lot of tax benefits, the plan also comes with drawbacks. Here are the disadvantages of a Roth 401(k) plan you should know.

Roth 401(k) does not offer upfront tax benefits
Contributions can take a big chunk of your money since they come from after-tax money
You still pay tax on employer match to the account during retirement
The plan has RMDs when you turn 73
There is a 5-year waiting period regardless of age before you can withdraw earnings from your tax-free.
A 10% penalty may apply if you get a payout before you turn 59½.

Should you choose Roth 401(k) over pre-tax 401(k)?

When it comes to making contributions and tax benefits, both 401(k)s are different. With a pre-tax 401(k), your contributions come from before-tax wages through payroll deductions. This allows you to grow your account on a tax-deferred basis and pay income tax on your distributions during retirement. Additionally, a pre-tax 401(k) gives you upfront tax benefits by reducing your taxable income.

On the other hand, contributions you make to Roth 401(k) come from after-tax wages through payroll deductions. This means that the Roth 401(k) does not lower your taxable income. With the Roth 401(k), however, you to grow your account without paying taxes and pay no tax on qualified distributions. If you received an employer match to the plan, however, you will pay income tax on those contributions and potential returns from them.

Should you choose a pre-tax 401(k) or a Roth 401(k)?

Just like any other retirement account, the choice you make depends on your unique financial situation and retirement goals. If you think you will have a higher income during retirement, having a Roth 401(k) can be a better choice to lower your tax liability.

On the other hand, if you think you will have a lower income during retirement than you have right now, a pre-tax 401(k) will be the best choice. With a pre-tax 401(k), you will lower your current taxable income and pay income tax during retirement.

Who can contribute to a Roth 401(k) plan?

Unlike a Roth IRA where eligibility is based on your modified AGI, you can contribute to a Roth 401(k) regardless of your income. This makes this plan a perfect choice when you want to maximize your after-tax contributions. This also gives you an upper hand if you are not qualified for a Roth IRA due to income limits.

Before you worry about making contributions Roth 401(k) plan, you first need to have a job with an employer who offers the plan and you must meet your employer’s requirements. Some employers require a waiting period before you qualify for retirement benefits.