Understanding Roth 401(k) Plans [2026]

Roth plans are a hybrid offered by employers that combine traditional 401(k) aspects with Roth IRAs. They are a relatively newer type of plan, created in 2001 to offset some of the economic effects of the recession of the time. Employers since 2006 have been able to amend their Traditional 401(k) plans to let participants make part or all of their contributions to Roth.[1]

Key aspects of Roth 401(k) plans

Roth contributions are post-tax contributions, taxed when you earn the income, not when the retirement distribution is made. So, say you earn $2000 per paycheck and contribute $200 as a Roth contribution. You will still pay taxes on the $2000. Whereas if you had made a traditional 401(k) contribution of $200, you’d pay taxes on an adjusted paycheck of $1800.[2],[3]
With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss. [4]
Employers must also offer the Traditional 401(k) plan, so some employers do not offer Roth 401(k) plans because of the extra burden of running two funds. Separate recordkeeping for each participant’s Roth and non-Roth accounts.1,[5]
Investment Options Mirror Traditional 401(k)s: Roth 401(k) accounts share the same investment menu as the employer’s Traditional 401(k). This typically includes target-date funds, mutual funds, index funds, bond funds, stable value options, or occasionally a brokerage window if the plan offers one. Unlike Roth IRAs, Roth 401(k)s do not offer unlimited investment choices and are confined to the plan’s curated lineup. All Roth and pre-tax money in the plan is invested using the same available fund menu.
Roth 401(k) plans do not have income limits for contributions. Unlike a Roth IRA, where eligibility to contribute phases out at higher income levels, anyone who has access to a Roth 401(k) through their employer can contribute, regardless of how much they earn.[6]
Employers must allow all employees to participate if they are 21 and above, have one year of service, and have 1000 hours of service per year. There are some restrictions beyond this for people who are not US citizens and some types of union members.

High Earners (New Roth Requirement): Beginning Jan. 1, 2026, employees with prior-year Social Security wages over $145,000 must make all catch-up contributions as Roth contributions, only if the plan allows them. If the plan does not allow Roth, High Earners cannot make catch-up contributions.

Catch Up Groups:
Employees age 50 or older (the standard catch-up eligibility age). Enhanced catch-up limits apply separately for ages 60–63 beginning in 2025 under SECURE 2.0.

How the $145,000 Threshold Is Determined
Based on Box 3 Social Security wages from the prior calendar year, it applies separately by employer under controlled group rules.

Long-Term, Part-Time Employees: Beginning in 2025, long-term, part-time employees who have completed at least 500 hours of service annually for three consecutive years will be eligible to participate in their employer’s 401(k) plan.
Automatic Enrollment Requirement: Enacted in 2025, newly established 401(k) and 403(b) plans are generally required to automatically enroll eligible employees, with an initial deferral rate of at least 3% of compensation. Eligible employees must be auto-enrolled at a 3% minimum contribution rate, increasing annually by 1% until reaching 10-15%. This applies to plans established after December 29, 2022, excluding new/small businesses, church, and government plans.
A 401(k)-plan sponsor is the plan fiduciary, legally responsible for selecting the plan’s investment options and monitoring their suitability. Generally, your employer is your 401(k)-plan sponsor.[10]
Fees vary from plan to plan, but the three categories are investment fees, plan administration fees, and individual service fees. It is crucial to understand how much you are paying in fees. [12]

Saver’s Credit and Upcoming Saver’s Match (2026–2027 Updates): Through 2026, lower- and moderate-income earners may qualify for the federal Saver’s Credit, which reduces income tax liability based on eligible retirement contributions. Employee elective deferrals to Traditional or Roth IRAs, 401(k)s (including Traditional, Roth, Safe Harbor, Solo, and SIMPLE 401(k)), 403(b)s, governmental 457(b)s, SIMPLE IRAs, and SEP IRAs can qualify. Only employee contributions count—not employer matches or profit-sharing.

Beginning in 2027, the SECURE 2.0 Act replaces the Saver’s Credit with the new Saver’s Match. Instead of receiving a tax credit, eligible participants will receive a federal matching contribution of up to 50% of their first $2,000 in retirement savings (up to $1,000), deposited directly into their retirement account. Roth 401(k)s are fully eligible for the Saver’s Match, making it more accessible for lower- and moderate-income earners to receive an actual deposit into their retirement savings rather than merely a tax reduction.

After-Tax Matching Contributions: Employer matching contributions are deposited as traditional, pre-tax funds by default, even when an employee contributes entirely to the Roth 401(k). Beginning in 2023, SECURE 2.0 allows employers to offer Roth employer matching contributions, but this feature must be specifically adopted in the plan document. If the employer does not opt in, all matches automatically go into the pre-tax portion of the account.

Separate Accounting for Roth Employer Match (If the Plan Allows It): When a plan permits Roth employer matching contributions, the plan must maintain separate accounting for vested and unvested Roth match dollars. Unvested Roth match contributions remain in a separate source until they vest, and forfeited Roth match funds must be tracked and removed according to plan rules. This is in addition to the standard requirement to keep Roth elective deferrals completely separate from pre-tax contributions and employer match buckets. [22]
Employers usually match at the same rate as traditional 401(k) plans; the average match for most companies in 2023 was 5%.[8]
Vesting is when you must stay with an employer to keep any money they match. The vesting period varies with employers but usually is in the range of 3 to 6 years. There are also variations in vesting schedules. Cliff vesting is where you go 100% vested at a set period. Graded vesting is where you earn a percentage of 100% each year. An example would be you are 33% vested in year one, 66% in year two, and 100% in year three.[9]

The Roth 401(k) “5-Year Rule” Applies Twice: Roth accounts follow a 5-year rule, which requires that earnings can only be withdrawn tax-free after the account has been open for at least five tax years and the participant meets a qualifying event (such as turning age 59½, disability, or death). Roth 401(k) funds can be rolled over only to another Roth account—typically a Roth IRA or a Roth 401(k) at a new employer. Rolling Roth 401(k) dollars into a Roth IRA does not avoid the 5-year rule; instead, the Roth IRA’s 5-year clock applies. If the Roth IRA has already been open for at least five tax years, the rollover money inherits that clock and may qualify for tax-free treatment sooner. If the Roth IRA is new, the rollover starts a fresh 5-year period. Roth 401(k) assets cannot be rolled into a Traditional IRA, ensuring Roth character is preserved during transfers. [21]

401(k)s are required to perform nondiscrimination tests (NDTs) annually to ensure that 401(k) retirement plans benefit all employees, not just high earners or company owners.[11]
Roth 401(k)s Still Must Pass Nondiscrimination Testing (ADP/ACP): Roth contributions are treated the same as pre-tax contributions for nondiscrimination testing, meaning they count fully in the ADP and ACP tests. Because of this, high earners who make significant Roth contributions can still cause the plan to fail testing, which may lead to corrective refunds—even though Roth IRAs do not face these rules.
Required Plan-Level Disclosure for Roth Contributions: Roth 401(k) accounts require strict separate accounting and reporting to distinguish Roth dollars from traditional pre-tax funds. Plans must maintain separate Roth balances, provide separate Roth information on participant statements, and report all Roth elective-deferral contributions on Form W-2 using Code AA to ensure proper IRS tracking.

Required Minimum Distributions (RMDs): In 2024, Roth 401(k) accounts will no longer be subject to RMDs, aligning them with Roth IRAs, which do not have RMD requirements. This change allows for greater flexibility in retirement planning and the potential for continued tax-free growth.

If you leave an employer, you can take your money with you. A Roth 401(k) can be rolled over to a new or existing Roth IRA or 401(k).[13]
In-Plan Roth Conversions (In-Plan Roth Rollovers): Many 401(k) plans now allow in-plan Roth conversions, enabling employees to convert pre-tax balances to Roth money within the same plan. This option must be permitted by the employer, and converted amounts are taxable in the year of conversion. There are no income limits and no requirement to leave the employer to complete the conversion, making this one of the most flexible Roth-related features available in workplace plans.
The earliest you can take penalty-free withdrawals is 59 ½; the penalty is an extra 10% on top of the taxes collected. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you lose your job at 55 or older, if you have medical expenses that exceed 10% of your modified adjusted gross income, with some divorce settlement types and if you die. This type of account must be opened five years before any distributions are made.[14]
Early Withdrawal Rules for Roth 401(k) Contributions vs. Earnings: Roth 401(k) withdrawals follow different rules than Roth IRAs. Withdrawals are taken pro-rata from contributions and earnings, not contributions first. This means a portion of a withdrawal may be taxable or penalized if taken before age 59½ and before meeting the 5-year rule. To qualify for tax-free earnings, the participant must satisfy both requirements: the Roth 401(k) must have been open for at least five tax years, and the participant must experience a qualifying event such as reaching age 59½, disability, or death. Because earnings can be included in a withdrawal before these conditions are met, early Roth 401(k) distributions can trigger taxes and the 10% early withdrawal penalty—unlike Roth IRAs, where contributions always come out tax- and penalty-free first. [18]
In-Service Withdrawals (Age-Based Withdrawals): Many Roth 401(k) plans allow in-service withdrawals once a participant reaches age 59½. This feature lets employees access their Roth 401(k) funds without separating from their employer, often used for rollover planning or early retirement strategies. In addition to age-based withdrawals, plans may also offer hardship withdrawals, birth and adoption withdrawals (up to $5,000), and new domestic-abuse emergency withdrawals. Tax treatment depends on whether the withdrawal includes earnings and whether the 5-year Roth rule has been met. [19]
Spousal Consent Rules for Certain Roth 401(k) Elections: Roth 401(k) accounts are subject to ERISA spousal-consent protections if the plan includes annuity distribution options. In these plans, a married participant must obtain written, notarized spousal consent to choose a non-joint annuity form of payment or to designate a non-spouse primary beneficiary. This rule applies to both the pre-tax and Roth portions of a 401(k). It is an important distinction from Roth IRAs, which have no spousal-consent requirements. [20]
Rollover Order Rules After Leaving an Employer: When Roth 401(k) funds are rolled into a Roth IRA, the Roth IRA’s withdrawal ordering rules apply—contributions first, conversions second, and earnings last. This ordering structure is much more favorable than the pro-rata rule inside Roth 401(k)s. A participant who rolls a Roth 401(k) to a Roth IRA may therefore gain more flexibility in taking tax- and penalty-free withdrawals, especially if the Roth IRA already has an established 5-year clock. [21]

Emergency Savings Account (ESA) Add-On (Optional Beginning 2024): SECURE 2.0 allows employers to attach an optional Emergency Savings Account (ESA) to a Roth-based plan such as a Roth 401(k). Employees can contribute up to $2,500, and withdrawals are allowed penalty-free at any time. ESA contributions are treated as Roth dollars, and employers may choose to match ESA contributions through the standard matching formula. This feature is optional for employers but is growing in adoption. [23]
RMD Still-Working Exception (Plan-Dependent): Roth 401(k)s are exempt from RMD requirements beginning in 2024, but the traditional side of a 401(k) may still be subject to RMDs unless the employee is still working and is not a more-than-5% owner of the company. If the plan adopts the “still-working exception,” the participant can delay RMDs from the employer’s Traditional 401(k) until actual retirement. This rule applies to both Traditional and Roth contributions prior to 2024. [24]

Automatic Rollover Threshold: Previously, if a former employee’s 401(k) balance was less than $5,000, plan administrators could transfer the funds into an IRA without the employee’s consent. The SECURE 2.0 Act raised this limit to $7,000, effective from 2025.

Simplified Hardship Withdrawals: The SECURE 2.0 Act allows for self-certification of hardship withdrawals, simplifying the process for participants to access funds in case of financial emergencies.

You can take a low-interest loan on Roth 401(k) accounts, up to $50,000 or 50% of your account balance. Still, you will have to pay it back sometimes within 90 days but definitely within five years (this period may be extended if the money is used to buy a primary home) or at leaving that job, or it becomes taxable income. The payments will most likely be held back from your paycheck. Some plans don’t let you contribute to your account until the loan is paid back. Interest charges go directly back into your retirement account.[17]

If you want to explore investment accounts that would work for your personal or retirement goals, Scarlet Oak Financial Services can be reached at 800.871.1219, or you can contact us here. To sign up for our newsletter with the latest economic news, click here.

Sources:

[1] https://www.groom.com/wp-content/uploads/2017/09/1161_Roth_401k_Plans.pdf

[2] https://www.investopedia.com/terms/r/roth401k.asp

[3] https://www.nerdwallet.com/article/investing/roth-401k

[4] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf

[5] https://www.investopedia.com/ask/answers/102714/are-roth-401k-plans-matched-employers.asp

[6] https://www.irs.gov/retirement-plans/roth-comparison-chart

[7] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000

[8] https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp

[9] https://www.gobankingrates.com/retirement/401k/is-money-401k-really-vesting-works/

[10] https://www.irs.gov/newsroom/irs-announces-changes-to-retirement-plans-for-2022

[11] https://www.forusall.com/401k-blog/401k-nondiscrimination-testing/

[12] https://smartasset.com/retirement/what-are-401k-fees

[13] https://www.bokfinancial.com/resources/articles/commercial-institutional/the-roth-401k

[14] https://www.investopedia.com/ask/answers/101314/what-are-roth-401k-withdrawal-rules.asp#roth-401ks-the-basics

[15] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmd

[16] https://www.tiaa.org/public/support/faqs/required-minimum-distributions

[17] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans

[18] https://www.irs.gov/publications/p575

[19] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions

[20] https://www.irs.gov/retirement-plans/plan-sponsor/fixing-common-plan-mistakes-failure-to-obtain-spousal-consent

[21] https://www.irs.gov/publications/p590b

[22] https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#:~:text=Does%20my%20employer%20need%20to,into%20a%20designated%20Roth%20account.

[23] https://bipartisanpolicy.org/article/emergency-savings-policy/#:~:text=The%20passage%20of%20two%20emergency,penalty%2Dfree%20at%20any%20time.

[24] https://www.loeb.com/en/insights/publications/2023/06/secure-2-0-act-changes-to-required-minimum-distribution-rules-for-retirement-plans#:~:text=Currently%2C%20Roth%20401(k),withdrawal%20from%20the%20529%20plan.

https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests

Clark

IRS

Investopedia

https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000

https://www.irs.gov/pub/irs-drop/n-25-67.pdf

https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500

This material has been prepared for informational purposes. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.

You can take a low-interest loan on Roth 401(k) accounts, up to $50,000 or 50% of your account balance. Still, you will have to pay it back sometimes within 90 days but definitely within five years (this period may be extended if the money is used to buy a primary home) or at leaving that job, or it becomes taxable income. The payments will most likely be held back from your paycheck. Some plans don’t let you contribute to your account until the loan is paid back. Interest charges go directly back into your retirement account.[17]