New Options for Roth 401(k)s – How to Maximize for Your Retirement

And alternatives for your heirs, too!

Many 401(k) plans now offer employees the option to put away money as a Roth contribution. As compared to a traditional 401(k), the main difference with a Roth 401(k) is when the IRS takes its cut. Roth 401(k) contributions are made post-tax, same as with a Roth IRA. Earnings grow tax-free, and you pay no taxes when you start taking withdrawals in retirement. This can be a massive amount of tax-free income in retirement, hence the allure of Roths.

Another key feature of Roth 401(k)s, is that beginning in 2024, the required minimum distributions (RMD) requirement for Roth 401(k)s will no longer apply due to changes from Secure Act 2.0. This means that earnings can perpetually grow tax-free. Further, from an estate planning perspective, if you pass down those Roth assets to your heirs, they won’t have to pay taxes on distributions either.

Roth 401(k) vs. Roth IRA

Effective 2024, the main differences between Roth 401(k)s and Roth IRAs are contribution limits and income limits:

  • IRA contributions limits are much lower than Roth 401(k)s. Roth IRAs are capped at $7,000 for 2024$8,000 if you’re 50 or older.
  • Roth 401(k)s don’t have an income limit for contributions. You can only make contributions to a Roth IRA if your modified adjusted gross income (MAGI) is less than $161,000 for single filers or $240,000 for married couples filing jointly or a qualified widow(er) for 2024.

Finally, a Roth 401(k) is only available through an employer plan (including self-employed). As long as you meet the above MAGI income requirements, you can open a Roth IRA on your own as part of your retirement strategy.

Roth 401(k) vs. Traditional 401(k)

Of course, taxes are a key consideration when it comes to deciding on a Roth 401(k) over a traditional 401(k). Discuss your personal situation (age, career status, current and future earnings, etc.) with your CPA to determine which is best for you. Your CPA can run taxation scenarios to determine whether it is best to pay the taxes now (Roth) or to take advantage of the current tax write-off, as in a traditional 401(k).

Another strategy to deal with uncertainties in future tax rates, income and spending might be to contribute to both a Roth 401(k) and a traditional 401(k). This combination offers both taxable and tax-free withdrawal options, so that in retirement you could determine which account to tap based on your tax situation.

Roth 401(k) Contributions Now Allowed By Employers

Previously, all employer matching or profit-sharing contributions were made as a traditional, tax-deferred contribution. However, the SECURE 2.0 Act provides greater opportunities for employees by allowing them to elect employer contributions as Roth 401(k) contributions.

In particular, employers may allow plan participants to designate employer matching and nonelective contributions as after-tax Roth 401(k) contributions. These contributions would be included in the employee’s taxable wage income for that year. Further, employer contributions designated as Roth 401(k) contributions must be immediately 100% vested.

A key feature of this option is that it allows employees to choose whether their matching contributions are taxed up front (Roth) or in retirement (traditional).


Each situation is different, so contact MyCFO to make all the right moves. Contact us today for a free initial consultation!