Do Roth 401(k)s Have Income Limits? And When It Makes Sense To Contribute

There are plenty of savings vehicles designed to help wealth builders transform their earnings today into future retirement income. Each offering has advantages and considerations, making it challenging to select the right option. 

Should you opt for accounts that can reduce your tax obligations today or delay the tax savings for retirement? There’s no right or wrong answer when choosing retirement savings vehicles since everyone’s financial situation looks different.

To help you navigate your options, here’s an in-depth look at a less-talked-about account, Roth 401(k)s. 

Traditional 401(k) Review

You’ve probably heard of and even contributed to a traditional 401(k). As a refresher, these are employer-sponsored retirement accounts funded with pre-tax dollars. When you contribute to your 401(k), you lower your taxable income during the year you contribute. But the government still needs to get its cut somewhere, which happens in retirement. When you withdraw from your traditional 401(k), you must pay income tax on the distributions (including the original amount you contributed and any earnings).

What Are Roth 401(k)s?

Roth contributions to a 401(k) work much like they would with a Roth IRA. The account is funded with after-tax dollars. While that means contributions don’t lower your taxable income for the year they’re made, you get to enjoy tax-free withdrawals in retirement.

To avoid taking a 10% penalty, hold the account for at least five years and wait until you’re 59.5 before taking distributions. Just like a traditional 401(k), there are contribution limits. In 2023, employees can contribute up to $22,500 or $30,000 for those 50 and older.¹ These contribution limits are adjusted annually for inflation.

Roth 401(k) vs. After-Tax 401(k) Contributions

As we discuss both traditional and Roth 401(k)s here, it’s worth noting that employees may also be able to contribute after-tax contributions to their traditional 401(k). The term “after-tax” may sound interchangeable with Roth in this context, but there’s a difference between the two.

Think of after-tax contributions as an expansion on your regular pre-tax contributions. Once you max out contributions to your traditional 401(k), you can make additional contributions using after-tax dollars. The kicker is that you can contribute in total (counting both pre-tax and after-tax contributions) up to $66,000 in 2023 or up to $73,500 if you’re over 50.¹ 

If you’re looking to stash more savings away for retirement beyond the typical 401(k) limits, after-tax dollars may be a viable option. However, it’s crucial to understand how they differ from Roth 401(k) contributions — which offer more tax benefits.

Any growth earned on your after-tax contributions is tax-deferred. In other words, while the principal amount you contributed using after-tax dollars can be withdrawn tax-free, you’re still on the hook for paying tax on the earnings. 

How SECURE 2.0 Changed Roth 401(k)s for Employees

At the end of 2022, Congress passed additional retirement reforms designed to expand changes made in 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act. This new legislation, the SECURE Act 2.0, includes changes to Roth 401(k)s.

Employers have traditionally been able to make matching contributions to employee Roth 401(k) accounts, though these contributions had to be with pre-tax dollars. But with the passing of SECURE 2.0, employers can now make matching contributions to Roth accounts, giving employees an extra retirement tax advantage. Employers can match up to $66,000 or 100% of the employee’s compensation in 2023, whichever is lower.²  

In addition, Roth 401(k)s will no longer have required minimum distributions (RMDs) beginning in 2024. If you’re eligible for RMDs in 2023, you must still take them. Failing to take RMDs can result in a 25% penalty on the amount you did not withdraw. 

What Are the Roth 401(k) Income Limits?

Trick question — they don’t have any! Any employee can contribute to a Roth 401(k) regardless of their income level, as long as their employer offers it.

Roth IRAs, on the other hand, do have income limits.³  

For married filing jointly in 2023: If you and your spouse have less than $218,000 in taxable income for the year, you can contribute up to the total amount to a Roth IRA. You can contribute a reduced amount if you earn between $218,000 and $228,000; if you earn over $228,000, you are ineligible. 

For single filers in 2023: You can contribute the total annual amount if you earn less than $138,000 annually. You can contribute a reduced amount if you earn between $138,000 and $153,000. If you earn over $153,000, you cannot contribute anything to a Roth IRA.

When It Makes Sense to Contribute to a Roth 401(k)s

Roth 401(k)s can be valuable tools for high earners because, unlike a Roth IRA, they are not subject to income limits. Regardless of how much you make, you can contribute to a Roth 401(k) if your employer offers it.

In general, Roth accounts are ideal for those who anticipate retiring in a higher tax bracket than the one they’re currently in. If you can pay taxes on those contributions now while you’re in a presumably lower tax bracket, you can keep more of your money in retirement. 

Even if you’re in a reasonably high tax bracket now, no one knows what the tax rate will be like — especially if retirement is still decades away. If you want to ease the financial stress for your future self, taking care of the tax obligation now could give you a significant boost later on when it matters most. 

Other Roth 401(k) Considerations

Contribution limits reset at the beginning of the calendar year, meaning you need to get all of your annual contributions into your Roth 401(k) by December 31. If you exceed the annual contribution limit, you risk tax penalties on the excess amount, so keep a close eye on your contributions.

Is a Roth 401(k) Right for You?

Retirement savings vehicles aren’t mutually exclusive, meaning you don’t have to pick just one type of account to contribute to each year. Since each comes with unique benefits and drawbacks, contributing to a combination of accounts can help you create well-balanced savings — similar to diversifying your investment portfolio!

If you have any questions about your retirement savings strategy or want to learn more about how we help families like yours prepare for retirement, feel free to schedule a time to talk with our team. 

^Sources:

^{1401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500}

^{2Retirement Plans FAQs on Designated Roth Accounts}

^{3Amount of Roth IRA Contributions That You Can Make For 2023}