| Factor | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contributions | Pre-tax — reduces current taxable income | After-tax — no current deduction |
| Growth | Tax-deferred | ✓ Tax-free |
| Qualified withdrawals | 100% ordinary income | ✓ 100% tax-free |
| RMDs | Required at age 73 or 75 | Required — but can roll to Roth IRA to eliminate |
| Income limits | None | None — no income limit for Roth 401(k) |
| Best for | Expect lower tax rate in retirement | ✓ Expect same or higher rate — or want certainty |
Roth 401(k) vs. Roth IRA — key differences
No income limit: Anyone can contribute to a Roth 401(k) regardless of income — there is no phase-out. High earners who cannot contribute directly to a Roth IRA can always use a Roth 401(k) if their employer offers one.
Higher limits: The Roth 401(k) limit ($23,000 in 2024, plus $7,500 catch-up at 50+) is much higher than the Roth IRA limit ($7,000). Combined with employer match, total contributions can reach $69,000 per year.
RMDs: Unlike a Roth IRA, a Roth 401(k) is subject to RMDs. The solution: roll your Roth 401(k) to a Roth IRA when you leave the employer — eliminating RMDs permanently.
The mega backdoor Roth — up to $43,500 extra into Roth per year
How it works: Some 401(k) plans allow after-tax contributions above the standard employee limit — up to the total plan limit of $69,000 (2024). If your plan allows in-service withdrawals or in-plan Roth conversions, those after-tax contributions can be immediately converted to Roth, effectively moving up to $43,500 into Roth each year in addition to the standard $23,000 contribution.
Requirements: Your plan must allow after-tax contributions and either in-service distributions or in-plan Roth conversions. Not all plans offer this — check your Summary Plan Description.
The tax math: The after-tax contributions themselves are not taxed again. Only the earnings on those contributions are taxable at conversion — typically minimal if you convert quickly (the "two-step" or "backdoor" approach inside the plan).
In-plan Roth conversions — convert without leaving your plan
Some 401(k) plans allow you to convert existing traditional 401(k) balances to Roth directly within the plan — without rolling to an IRA first. This is valuable if you want to do a Roth conversion but your plan has institutional investment options, low-cost funds, or other features you want to retain. The converted amount is taxable in the year of conversion, but future growth and distributions are tax-free. Particularly useful in low-income years such as the retirement-to-RMD window.
Ed Slott: "NUA is one of the most overlooked tax breaks hiding in a 401(k)"
If you hold highly appreciated employer stock in your 401(k), the NUA strategy allows you to take a lump-sum distribution in-kind — paying ordinary income tax only on your original cost basis, with all appreciation (the NUA) taxed at long-term capital gains rates of 0%, 15%, or 20% when you eventually sell. This can convert a significant portion of what would be ordinary income into capital gains treatment — a potentially large tax savings for concentrated employer stock positions.
| Factor | Roll to IRA (default) | NUA lump-sum distribution |
|---|---|---|
| Tax on cost basis | All distributions ordinary income | Ordinary income on cost basis only at distribution |
| Tax on appreciation | All ordinary income when distributed from IRA | ✓ Long-term capital gains (0%–20%) when stock is sold |
| Triggering event required | None — can roll at any time | Lump-sum distribution on separation, 59½, death, or disability |
| Best for | Low cost basis relative to value is small | ✓ Large appreciation — low cost basis relative to value |
| Contribution type | 2024 limit | Notes |
|---|---|---|
| Employee elective deferrals | $23,000 | Traditional + Roth combined cannot exceed this limit |
| Catch-up contribution (age 50+) | +$7,500 | Total employee limit: $30,500 for age 50+ |
| Total plan limit (including employer) | $69,000 | $76,500 including catch-up for age 50+ |
| After-tax contributions (mega backdoor) | Up to $46,000 | Total limit minus employee and employer contributions |