In this article, we’ll review the benefits of Roth accounts and cover these important topics:
- Differences between pre-tax and Roth (after-tax) savings
- How Roth IRA and 401(k) Roth contributions are taxed
- Key differences between Roth IRAs and Roth contributions in a 401(k)
- Contribution and income limits
- Required Minimum Distributions (RMDs)
Pre-Tax or Roth (After-Tax) Savings
From a tax perspective, Roth IRAs (Individual Retirement Accounts) and Roth contributions in a 401(k) plan are treated differently than traditional IRA and traditional 401(k) accounts.
With a traditional (pre-tax) account, contributions may reduce your taxable income today. In exchange for that tax benefit now, withdrawals in retirement are taxed as ordinary income. The idea behind traditional accounts is that you may be in a lower tax bracket in retirement.
With Roth accounts, it’s the reverse. Contributions are made with after-tax (Roth) dollars, meaning there is no upfront tax deduction. However, qualified withdrawals in retirement, including earnings, are tax-free, provided you are at least age 59½ and have satisfied the five-year rule.
Savings Benefits
At first glance, many people believe traditional (pre-tax) contributions may be more beneficial because of the immediate tax savings. Others assume they will be in a lower tax bracket in retirement.
While Vestwell does not provide tax or investment advice, we offer general educational information to help you make informed decisions about your retirement savings. You should consider consulting a qualified financial or tax professional regarding your specific situation.
Consider this example:
If an individual contributes $200 per month over 10, 20, 30, or 40 years, those contributions can grow significantly over time. Over 40 years, total contributions would equal $96,000. Assuming a hypothetical 7% annual rate of return, those contributions could grow to more than $528,000
So, What’s the Bottom Line?
Ask yourself: Would you rather pay taxes on $96,000 now, or potentially on $528,000 in retirement?
Some people describe this as paying tax on the “seed” rather than the “harvest.” We don’t know what future tax brackets will look like. Even if you were in a lower tax bracket in retirement, the total taxes paid on a larger amount could still be meaningful.
For example:
- 20% tax on $96,000 equals approximately $19,200.
- 15% tax on $528,000 equals approximately $79,200.
This simplified illustration shows why some savers prefer Roth contributions – taxes are paid on the principal going in, and qualified earnings are withdrawn tax-free. Again, the right choice depends on your individual tax situation and long-term strategy. Consulting a financial or tax professional can help you determine what’s appropriate for you.
Note: You may contribute to both a Traditional IRA and a Roth IRA in the same year, as long as your total contributions do not exceed the annual IRA limit. For 2026, the IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution available to individuals age 50 or older. (Limits are subject to annual IRS updates.)
Things to Keep in Mind
- Consider your timeline for retirement and when you plan to begin taking distributions.
- You may generally contribute more to a 401(k) plan (traditional and Roth combined) than to an IRA.
- There are no income limits for making Roth contributions within a 401(k) plan.¹
- Under SECURE 2.0 (effective 2024), Roth accounts in 401(k) plans are no longer subject to Required Minimum Distributions (RMDs) during the original owner’s lifetime.²
- Non-working spouses may be eligible to contribute to a Roth IRA. Consult with a tax professional.
Roth IRA and 401(k) Differences
The chart below highlights key differences between Roth IRAs and Roth contributions in a 401(k) plan.
2026 Information
| Roth IRA | Roth 401(k) | |
| Annual Contribution Limits | 2026 – $7,500/$8,600 (50 or older) | 2026 – $24,500/$32,500 (50 or older) |
| Tax and Penalty-free withdrawals after five years, and age 59 and a half | Yes | Yes, however, some workplace retirement plans may restrict access to withdrawal units after separation from service. |
| Required Minimum Distribution | No | Yes |
| Tax-deductible Contributions | No | No |
| Income Limits and Phase Out | 2026 – More than $153,000 but less than $168,000 for single taxpayers and more than $242,000 but less than $252,000 for married taxpayers. | None |
| Eligible or Rollovers | You may Rollover other Roth accounts into IRA; however, you may not roll Roth IRAs into Roth 401(k) | You may Rollover Roth 401(k)s from one employer's plan to another, and you may roll Roth 401(k)s into Roth IRAs |
*401(k) limits reflect combined employee traditional and Roth contributions. Limits are subject to IRS updates.
1. There are income limits for contributing to a Roth IRA and for deducting contributions to a Traditional IRA. Please refer to the IRS website for the most up-to-date information. Phase-out ranges indicate where contribution limits begin to be reduced and where eligibility ends. Limits generally change annually.
2. Roth IRAs are not subject to RMDs during the original owner’s lifetime but may be subject to distribution rules for beneficiaries. Beginning in 2024, Roth accounts in 401(k) plans are also exempt from lifetime RMDs under SECURE 2.0.
3. Employer-sponsored retirement plan balances (including Roth contributions in a 401(k)) may be rolled into a Roth IRA. Pre-tax amounts rolled to a Roth IRA require a Roth conversion and may trigger taxable income.