The Roth 401(k) option inside the plan

How it works

The worker chooses on the plan's website how much of each contribution goes to the Roth side, the traditional side, or both. Roth deferrals do not lower this year's taxable income, and they share the same yearly cap of this year's official 401k elective deferral limit (not yet verified here; see the official source below) with traditional deferrals, so the two together cannot pass that line. There is no income limit for a Roth account inside a workplace plan, which is different from a Roth IRA. A withdrawal of earnings is tax free when the account has been open five years and the worker is at least 59 and a half, disabled, or has died. Employer matching money may land in either side depending on how the plan is written, and the plan administrator can say which.

What it gives

Qualified withdrawals, including all the growth, come out with no federal income tax.

There is no income phase out, so a high earner shut out of a Roth IRA can still use this door.

A worker in a low tax year pays tax now at a low rate and avoids tax later at whatever rate applies then.

What it costs, or where the catch is

Nothing is deducted this year, so the paycheck shrinks by the full contribution.

The five year clock and the age rule both have to be met before earnings come out tax free.

A worker who ends up in a lower tax bracket in retirement has paid tax at a higher rate than was needed.

A worked example

Theo is 26 and earns $45,000, in the 12 percent bracket. He sends $300 a month to the Roth side of his plan, which is $3,600 a year. The tax he pays on that money now is $3,600 times 0.12, or $432. Forty years later, if the account has grown to $60,000, every dollar comes out tax free, so the $432 paid at age 26 is the only tax that money ever sees.

Where it goes wrong

The most common miss is assuming a plan has a Roth side when it does not, or assuming the employer match also goes in as Roth money when the plan puts it on the traditional side.

Who confirms it for you

For your own numbers, the plan administrator or HR. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.

The official source

IRS: Designated Roth accounts. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.