Understanding Roth 401(k) Contributions

Many investors rely on workplace retirement plans to build their long-term savings through automatic paycheck deductions. Yet, it’s surprising how many employees aren’t taking full advantage of these opportunities, particularly with options for tax-free growth.

Data from Vanguard indicates that while 86% of retirement plans offered Roth contributions in 2024, only 18% of eligible investors chose to participate. It’s worth noting that the 401(k) saw a slight uptick from 17% participation in 2023 to now.

One possible reason for this low participation rate could be that many plans default to pre-tax contributions, leaving investors to actively switch to Roth options if they wish.

“I think there’s a gap in understanding regarding the benefits of tax-free growth,” says Jordan Whitledge, a lead advisor at Donaldson Capital Management in Evansville, Indiana. Younger or higher-earning investors seem to be more inclined to opt for Roth contributions, according to Vanguard’s findings.

Here are a few key aspects to consider about Roth 401(k) contributions and whether this option might be right for you.

How Roth 401(k) Contributions Work

Typically, workplace retirement plans provide two main options for employee contributions: pre-tax or after-tax Roth contributions. It’s interesting how a significant number of plans offer different post-tax options, which allow high savers to go beyond standard contribution limits.

In 2025, the maximum you can defer to a 401(k) is $23,500, with an additional “catch-up contribution” of $7,500 for those over 50. Notably, this catch-up amount rises to $11,250 for those aged 60 to 63.

While pre-tax contributions come with upfront tax deductions, the downside is that investors will owe regular income tax upon withdrawal during retirement. Additionally, pre-tax funds are subject to required minimum distributions (RMDs), potentially leading to IRS penalties if not managed correctly. The initial RMD deadline is April 1 of the year following when you turn 73.

Conversely, Roth contributions are made post-tax, and their growth won’t be taxed. The original account owner isn’t subject to RMDs, though heirs will face the 10-year rule, requiring the account to be fully depleted within a decade after the owner’s passing.

For some investors—especially those with significant pre-tax holdings—RMDs can pose challenges in their retirement planning, according to Whitledge.

This also creates issues for heirs who must withdraw from pre-tax accounts, which could inadvertently spike their taxable income, as experts note.

Evaluating Pre-tax vs. Roth Contributions

Although tax-free growth can be appealing, it’s essential to consider broader tax implications when deciding to contribute to a Roth account. Financial advisors often suggest a mixed approach, weighing current and anticipated future tax rates.

“If you expect to be in a higher tax bracket during retirement, the Roth option really allows you to lock in today’s rates,” says CFP Mike Casey, president of an advisory firm in Virginia.