Definition
A 401(k) option funded with after-tax payroll dollars: no tax deduction today, but qualified withdrawals in retirement, including all the growth, are tax-free. Unlike a Roth IRA it has no income limit, and employer matching dollars are typically contributed pre-tax unless the plan offers Roth matching.
Why it matters
The Roth 401(k) lets high earners who are locked out of Roth IRAs still build tax-free retirement money, at full 401(k) scale. The traditional-versus-Roth choice is ultimately a bet on whether your tax rate is higher now or in retirement.
Example
An employee contributes $500 per paycheck. As a pre-tax contribution it might shrink take-home pay by only $390; as a Roth contribution it costs the full $500 now, and in exchange the entire future balance, growth included, comes out tax-free.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.