Roth Feature Boosts Benefits for 401(k) & 403(b) Plans

Paying the taxes upfront can mean significant savings in the long run

Roth 401(k) and Roth 403(b) plans can be smart choices if you want tax-free income in retirement and are willing to pay some taxes upfront. Here's a look at how the plans work, some of their pros and cons, and how they stack up against traditional 401(k) and 403(b) plans.

Key Takeaways

  • If your employer offers a Roth 401(k) or Roth 403(b), you'll pay taxes now but not in retirement if you choose one of them.
  • Unlike Roth IRAs, Roth 401(k)s and Roth 403(b)s aren't subject to income limits, so you're eligible no matter how much you earn.
  • Contributing to a Roth IRA and a Roth 401(k) or 403(b) can add additional growth.
  • You can avoid required minimum distributions by rolling over the account into a Roth IRA.

How Roth 401(k) and 403(b) Plans Work

Roth 401(k) and 403(b) plans work much the same as traditional plans, except that they are funded with after-tax contributions and taxed similarly to a Roth IRA.

As with Roth IRAs, eligible distributions from the account (including earnings) are generally tax-free. A qualified distribution from a Roth 401(k) is:

  • A distribution that is made after a 5-year taxable period of participation
  • Made on or after the date you attain age 59½
  • One made after your death to your heirs
  • Attributable to your being disabled
  • A distribution because of a qualified hardship.

The maximum contribution for 2023 is $22,500, plus an additional $6,500 catch-up contribution for employees who are at least age 50 by the end of the year, for a total of $29,000 in 2023.

If the employee is over 50, they can contribute an additional $1,000 per year; however, only the employee's contributions can go into the Roth account; any matching contributions from the employer must go into a traditional pre-tax account and be taxed upon withdrawal.

Pros and Cons of Roth Plans

Roth 401(k) and 403(b) plans have advantages and disadvantages—not only compared with traditional 401(k)s and 403(b)s but with Roth IRAs.

  • Tax-free withdrawals

  • Distributions don't count as income

  • No income limits

  • Not all employers offer them

  • Required minimum distributions

  • Taxes on contributions


  • Tax-free withdrawals: Withdrawals from the account are tax-free
  • Not counted as income: Distributions from traditional 401(k)s count as ordinary income, which can affect the taxability of a retiree's Social Security benefits and potentially raise their tax bracket. Distribution from Roth 401(k)s and 403(b)s do not.
  • Not subject to income limits: Roth IRAs have an income limit, whereas Roth 401(k)s and 403(b)s do not.


  • Required minimum distributions: Unlike Roth IRAs, Roth 401(k)s and 403(b)s are subject to required minimum distributions (RMDs) after the account holder reaches age 73 if they were born between 1951 and 1959, or 75, if they were born in 1960 or after, much like a traditional 401(k) or 403(b) account.
  • Not all employers offer them: Although Roth 401(k)s and 403(b)s are becoming more widespread, not every employer offers one as an option. But note that if you're self-employed, either full-time or part-time, you could be eligible to establish an independent 401(k) and designate money you contribute to it as Roth contributions. These plans can also have higher contribution limits than other 401(k) plans if you qualify as a sole proprietor.
  • Taxes on contributions: Your contributions are taxed. If you're considering one of these Roth plans, it helps to estimate what your taxes will look like in the future to see if you're getting a tax benefit from the plan.

If your circumstances change and you decide you don't want your money in one of these Roth plans, you can always roll over your balance into a Roth IRA. This will alleviate any worry about RMDs and give you an option if you need it. It also makes it possible to leave more of the account to your heirs than with a traditional plan.

Combining a Roth IRA With a Roth 401(k) or 403(b)

You can contribute to a Roth 401(k) or Roth 403(b) and a Roth IRA for some enhanced benefits. Here's how it would work, with the differences explained.

A $22,500 Roth 401(k) contribution made annually for 20 years, earning a relatively conservative rate of 5% a year, would add up to more than $740,000. That doesn't include any catch-up contributions or increases in the maximum allowable contribution. Plus, all of that money is tax-free if the account holder meets the Roth's qualified distribution requirements.

Lower-salaried employees can contribute to a Roth 401(k) or 403(b) plan at work and still contribute to a Roth IRA as long as their incomes do not exceed the IRA's threshold amount.

An employee in 2023 who contributed $22,500 to a Roth 401(k) or 403(b) plus $6,500 to a Roth IRA for 20 years and whose accounts grew at an annual rate of 5% would end up with almost $960,000—all of it potentially tax-free.

If you're married and file taxes jointly, are under 50, and have a modified adjusted gross income (MAGI) of less than $218,000, you're eligible for a full IRA contribution of $6,500. So, your total yearly contribution to a Roth 401(k) or 403(b) plus a Roth IRA could be:

  • Roth 401(k) or 403(b) contribution: $22,500
  • Roth IRA contribution: $6,500
  • Total: $29,000

For someone over 50:

  • Roth 401(k) or 403(b) contribution: $30,000
  • Roth IRA contribution: $7,500
  • Total: $37,500

In most scenarios, Roth 401(k)s and 403(b)s come out ahead of their traditional counterparts.

So Which Is Better: Roth or Traditional Plans?

Conventional wisdom says it's important to know whether you will be in a higher or lower tax bracket in retirement before deciding between a Roth or a traditional plan. In many cases, though, this may not matter.

For example, Sally Saver is in the 24% tax bracket and works for an employer that offers a Roth 401(k). She dutifully saves $15,000 a year in her Roth account for 30 years. But because Sally is making after-tax contributions, the contributions actually cost $18,360 a year ($15,000 plus $3,600 in taxes because the amount is not tax-deferred). Therefore, at the end of 30 years, Sally will have paid a total of $108,000 in taxes on her Roth contributions.

Meanwhile, a friend, Nancy Now, contributes to a traditional 401(k). Nancy is also in the 24% tax bracket and enjoys an annual tax reduction of $3,600 on contributions because they are made on a pre-tax basis. Nancy thus reduces taxes by a total of $108,000 over 30 years. Assuming that both earn an average of 5% on their investments, they will each have nearly $1 million in their plans by the time they retire.

Now assume both Sally and Nancy begin drawing money from their plans at the end of the 30-year period, that they remain in a 24% tax bracket, and they each withdraw $50,000 a year. Nancy must pay $12,000 per year on the distributions, while Sally pays nothing. If both people live for another 30 years, Nancy will have paid a total of $360,000 in taxes on the 401(k) distributions. In addition, Nancy's distributions will likely trigger at least a partial tax on Social Security benefits.

Can I Contribute to Both a 403(b) and a Roth 403(b)?

If you don't exceed the income limits for the Roth 403(b), you can contribute to both, but you can't exceed the total contribution limit.

How Much Can You Contribute to a 403(b) and Roth 403(b)?

If you're under 50, you can contribute a maximum of $22,500 between the two. If you're 50 or older, you can contribute $22,500 plus a $7,500 catch-up contribution between the two plans starting in 2023.

Is There an Income Limit for a Roth 403(b) and Roth 401(k)?

There are no income limits for Roth 401(k) and 403(b) plans.

The Bottom Line

This scenario above is a telling example of the benefit of biting the bullet and paying taxes now instead of later if you can afford to. Although such variables as changes in tax rates, longevity, and investment performance must also be taken into account, the Roth account tends to beat the traditional plan in most scenarios like these.

However, disciplined savings can change the equation somewhat. You'll remember that Nancy Now saved $3,600 a year in tax reductions by putting her money in a traditional 401(k). If she had invested those savings every year and earned 5% on the money, she would have about $240,00 after 30 years—enough to pay a significant chunk of the taxes on her IRA withdrawals.

Article Sources
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