Roth 401k
An employer-sponsored retirement plan allowing after-tax contributions that grow and are withdrawn tax-free.
Example
“She chose the Roth 401k over traditional because she expected higher taxes in retirement.”
Memory Tip
ROTH 401K — after-tax now, tax-free forever. Best when taxes will rise.
Why It Matters
The Roth 401k matters because it offers a unique way to save for retirement with significant tax advantages. By paying taxes now on contributions, you can withdraw all growth and earnings completely tax-free in retirement, which can result in substantial savings over decades of investing.
Common Misconception
Many people assume that a Roth 401k is the same as a regular 401k, but the key difference is the tax treatment. With a traditional 401k you get a tax deduction today and pay taxes on withdrawals later, while a Roth 401k does the opposite by taxing contributions now but making withdrawals tax-free.
In Practice
Consider an employee who contributes 10,000 dollars per year to a Roth 401k for 20 years and earns an average 7 percent annual return. After two decades, the account could grow to approximately 409,000 dollars, and every penny of that growth can be withdrawn tax-free in retirement, unlike a traditional 401k where taxes would apply to the entire distribution.
Etymology
Named after Senator William Roth — the Roth version of the traditional 401k.
Common Misspellings
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