A Roth deferral is a contribution taken from your paycheck and put into an employer retirement plan such as a 401(k), 403(b), or governmental 457(b) using dollars that have already been taxed. You get no deduction today. In exchange, the money grows without further tax, and qualified withdrawals in retirement come out entirely tax-free, including decades of investment earnings.1Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
How the Tax Treatment Works
When you elect Roth deferrals, your employer calculates federal and state income tax on your full salary first, then withholds the contribution. Your paycheck is smaller than it would be under a traditional pre-tax deferral of the same amount, because you haven’t reduced your taxable wages.1Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
The money then lands in a designated Roth account inside the plan. Dividends, interest, and capital gains compound with no tax drag. When you take a qualified distribution later, the entire balance leaves the account free of federal income tax.2Internal Revenue Service. Retirement Topics – Designated Roth Account
A $10,000 Roth deferral that grows to $80,000 over 30 years generates $70,000 of earnings that will never be taxed. The same contribution to a traditional pre-tax account produces the same growth, but every dollar of the $80,000 withdrawal is taxed as ordinary income.
Roth Deferrals vs. Traditional Pre-Tax Deferrals
The choice comes down to when you’d rather pay tax. A traditional deferral cuts your taxable income in the year you contribute and taxes everything, contributions and earnings, on the way out.3Internal Revenue Service. Roth Comparison Chart A Roth deferral does the opposite: no break now, no tax later on qualified withdrawals.2Internal Revenue Service. Retirement Topics – Designated Roth Account
Take an employee in the 24% federal bracket contributing $10,000. A traditional deferral saves $2,400 today. A Roth deferral costs that $2,400 today but locks in tax-free treatment on the whole future balance. If the retirement tax rate is also 24%, the two roughly break even. Roth wins if your future rate is higher; traditional wins if it’s lower.
Since most people can’t know their future rate with confidence, splitting deferrals between both accounts is a common approach. Having tax-free Roth money alongside taxable traditional money lets you control your taxable income year by year in retirement, pulling from the Roth in high-income years and the traditional account in leaner ones.
2026 Contribution Limits
The IRS caps how much you can defer into an employer plan each year, and the cap covers your combined Roth and traditional contributions. For 2026, the elective deferral limit is $24,500.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 You can put all of it into Roth, all of it into traditional, or divide it however you want.
Catch-up contributions let older workers save more:
- Age 50 and over: an additional $8,000, bringing the total to $32,500.
- Ages 60 through 63: a higher catch-up of $11,250 under SECURE 2.0, bringing the total to $35,750.
These catch-up amounts apply to 401(k), 403(b), governmental 457(b), and Thrift Savings Plan participants.5Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
One point that trips people up: the limit follows the employee, not the plan. If you work two jobs that each offer a 401(k), your combined elective deferrals across both plans cannot exceed $24,500, plus any catch-up you’re eligible for. Going over triggers excess deferral penalties.
No Income Limit
Unlike a Roth IRA, which phases out for single filers with modified adjusted gross income above $153,000 and married-filing-jointly filers above $242,000 in 2026, Roth deferrals into an employer plan have no income restriction. A surgeon earning $600,000 can make the full $24,500 Roth deferral. That makes workplace Roth deferrals the most direct route for high earners to move money into a Roth account.
When Withdrawals Come Out Tax-Free
Tax-free treatment isn’t automatic. A distribution has to be “qualified,” which means meeting two conditions at once.2Internal Revenue Service. Retirement Topics – Designated Roth Account
First, the withdrawal must be triggered by one of three events: reaching age 59½, becoming totally and permanently disabled, or death (in which case a beneficiary takes the distribution).6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Second, the distribution must happen after a five-year aging period. The clock starts on January 1 of the first year you made any designated Roth contribution to that specific employer’s plan. A first Roth deferral in March 2024 starts a period that runs from January 1, 2024 through December 31, 2028.1Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
Both conditions have to be satisfied. Someone 62 who made a first Roth deferral three years ago doesn’t qualify yet. Someone with an eight-year-old Roth account who is only 55 doesn’t qualify either. Meet both, and the entire withdrawal is tax-free and penalty-free.
Early Withdrawals Are Prorated
Pull money out before meeting both qualified-distribution requirements and the tax treatment depends on the makeup of your account. Designated Roth 401(k) accounts use a pro-rata rule, not the ordering rules that apply to Roth IRAs. Every non-qualified distribution is treated as coming partly from contributions and partly from earnings, in proportion to the mix in the account.7Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
If your Roth 401(k) holds $9,400 in contributions and $600 in earnings, roughly 94% of each dollar withdrawn is treated as contributions and 6% as earnings. The contribution portion comes out tax-free. The earnings portion is taxed as ordinary income, and if you’re under 59½, the earnings portion also gets hit with a 10% early withdrawal penalty.6Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
This differs from a Roth IRA, where contributions come out first, then conversions, then earnings. With a Roth 401(k), you cannot strategically withdraw “just contributions” to sidestep tax on an early distribution.
Rolling a Roth 401(k) Into a Roth IRA
When you leave an employer, you can roll your designated Roth account into a Roth IRA or into a new employer’s Roth 401(k). How the five-year clock behaves depends on the destination.
Rolling into another employer’s Roth 401(k) carries the previous plan’s five-year period over, so you don’t restart the clock.1Office of the Law Revision Counsel. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
Rolling into a Roth IRA is different. The time your money spent inside the Roth 401(k) doesn’t count toward the Roth IRA’s own five-year period. That period is measured from your first contribution to any Roth IRA. If you opened a Roth IRA six years ago and are over 59½, the rolled-over funds qualify for tax-free withdrawal from the Roth IRA immediately.7Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
The practical move: if you might ever roll a Roth 401(k) into a Roth IRA, open and fund a Roth IRA now, even with a small amount, so the IRA’s five-year clock is already running.
SECURE 2.0 Changes to Know
Several SECURE 2.0 provisions changed how Roth deferrals work inside employer plans.
Mandatory Roth Catch-Ups for High Earners
For taxable years beginning after December 31, 2026, participants who earned more than $145,000 in FICA wages (indexed for inflation) from their employer in the prior year must make all catch-up contributions on a Roth basis.8Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions For the first applicable year (2027), the threshold is expected to sit near $150,000 based on indexing. Plans may adopt the rule earlier voluntarily. Below the threshold, you can still choose pre-tax or Roth catch-ups. Only catch-ups are affected; regular deferrals up to $24,500 can still be split however you like, regardless of income.
Employer Matches Can Now Be Roth
Before SECURE 2.0, employer matching contributions went into a pre-tax account even if your own deferrals were Roth. That’s still the default in many plans.7Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts Plans can now let employees designate matching and nonelective employer contributions as Roth.9Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2 If you elect Roth treatment for the match, the employer contribution counts as gross income to you in the year it’s contributed, taxable for income tax but not for Social Security or Medicare. Those matching dollars and their future earnings then qualify for tax-free withdrawal under the same rules as your own Roth deferrals.
No More Lifetime RMDs on Roth 401(k) Accounts
Designated Roth accounts in employer plans used to be subject to required minimum distributions during the owner’s lifetime, unlike Roth IRAs. SECURE 2.0 ended that. Roth 401(k) and 403(b) accounts are no longer subject to RMDs while the owner is alive.10Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs You can leave the money in the employer plan indefinitely and let it keep growing tax-free.