Roth 401(k)s offer tax-free growth — but few workers use them

For a lot of buyers, office retirement plans construct long-term financial savings through automated paycheck deferrals. However most staff do not make Roth contributions, which might develop tax-free. 

Some 86% of retirement plans, akin to 401(okay)s, provided Roth contributions in 2024, however solely 18% of buyers with the choice participated, in keeping with Vanguard’s 2025 evaluation of greater than 1,400 qualified plans and practically 5 million contributors.

That is up slightly from 17% who made a Roth 401(okay) contribution in 2023.

One motive for low adoption is that plans sometimes default to pre-tax contributions, which means buyers should swap to the Roth possibility, specialists say.

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“I do not know that folks perceive the advantages of the tax-free development,” mentioned licensed monetary planner Jordan Whitledge, lead advisor at Donaldson Capital Administration in Evansville, Indiana. 

Youthful or higher-income buyers usually tend to make Roth contributions, in keeping with the Vanguard report.

Listed here are some key issues to learn about Roth 401(okay) contributions — and know if this selection is best for you.

Most office retirement plans supply two decisions for worker deferrals: pre-tax or after-tax Roth. (A smaller proportion of plans additionally supply after-tax contributions, that are totally different from Roth, and permit massive savers to exceed the employee deferral limit.)  

For 2025, you’ll be able to defer as much as $23,500 into your 401(okay), plus an additional $7,500 in “catch-up contributions” for those who’re age 50 and older. That catch-up contribution jumps to $11,250 for buyers aged 60 to 63.

Whereas pre-tax contributions supply an upfront tax break, you will owe common revenue taxes on withdrawals in retirement, relying on your tax bracket.

Pre-tax funds are topic to required minimum distributions, generally known as RMDs, or you could face an IRS penalty. The primary deadline for RMDs is April 1 of the yr after you flip 73, and Dec. 31 is the due date for future years.

By comparability, Roth contributions are after-tax, however your steadiness grows tax-free. For Roth accounts, the unique account proprietor will not face RMDs, however sure heirs are subject to the 10-year rule, which means the account have to be emptied inside 10 years of the unique proprietor’s demise.

For some buyers, particularly for these with a big pre-tax steadiness, RMDs generally is a ache level in retirement, Whitledge mentioned.

This may also be a problem for heirs who could should empty pre-tax accounts and enhance their adjusted gross revenue throughout their peak incomes years, specialists say.