Roth IRAs are a retirement savings tool many people know about and are comfortable with. But Roth 401(k)s don't tend to be as well known, even though they've been around for a long time.
During the first quarter of 2025, 16.8% of workers contributed money to a Roth 401(k), according to data from Fidelity. That's up from 15.2% a year prior.
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If your workplace 401(k) plan offers a Roth savings option, you may be hesitant to sign up for it. But a Roth 401(k) could end up making your retirement a lot smoother financially.
It's worth forgoing the up-front tax break
There's a reason traditional 401(k)s appeal to many savers. With a traditional 401(k), you get a tax break on the money you contribute. And that's a benefit that's hard to pass up.
Roth 401(k)s don't offer a tax break on contributions. They're funded with after-tax dollars. But they offer a host of benefits traditional 401(k)s do not.
For one thing, Roth 401(k)s offer tax-free investment gains. With a traditional 401(k), your gains are tax-deferred, but you pay the IRS a portion of your gains eventually.
Here's what that means. Let's say you contribute a total of $100,000 to a Roth 401(k) during your career, but by investing your money wisely, you're able to grow your balance into $800,000. That means you can walk away with $700,000 in gains without the IRS taking a dime.
Also, Roth 401(k) come with tax-free distributions. Taxes can be a stressful thing to deal with when you're earning a paycheck. When you're retired and on a fixed income, they can be even more of a burden.
With a Roth 401(k), you won't have to pay taxes on your distributions at a time in life when money could be tighter. That could result in a lot more spending power during your senior years.
Also, because Roth 401(k) withdrawals aren't taxable income, they don't count toward the formula that dictates whether Social Security benefits are taxed. By saving in a Roth, you could spare yourself taxes on those monthly benefits.
There's also flexibility to consider
The purpose of funding any 401(k), whether it's a traditional or a Roth, is to have money earmarked for retirement. But sometimes, emergencies happen. With a Roth 401(k), you can take an early withdrawal (before age 59 1/2) without a penalty provided you don't touch the gains portion of your account.
Also, unlike traditional 401(k)s, Roth 401(k)s do not force savers to take required minimum distributions in retirement. This means you can leave your balance alone to keep growing as long as you want to. You can also, if it fits your plans, leave a nice portion of your nest egg behind to your loved ones.
All told, there are numerous benefits to having a Roth 401(k), so it's not surprising to see that more people opting to save in one. If your workplace retirement plan has a Roth component, it pays to take advantage. It could end up being one of the savviest financial moves you'll ever make.
