The Roth 401(k) Option: What Plan Sponsors Need to Know

For years, a Roth option was a nice extra in a 401(k). Recent law changes have made it something closer to a necessity for many plans. If your plan does not offer Roth contributions yet, now is a good time to look at what adding them would involve.

Traditional versus Roth contributions

The difference comes down to when taxes are paid.

Traditional (pre-tax) contributions reduce an employee's taxable income in the year they are made. The contributions and their earnings are taxed when withdrawn.

Roth contributions are made with after-tax dollars, so there is no tax break up front. Qualified withdrawals, including earnings, are tax-free. A withdrawal is generally qualified if the participant is at least age 59½ and the Roth account has been open for at least five years.

Both types of contributions share the same annual deferral limit. An employee can typically split contributions between them in any proportion the plan allows.

No income limits

Roth IRAs have income limits that phase out eligibility for higher earners. Roth 401(k) contributions do not. Any eligible employee can make them, regardless of income.

That makes a Roth 401(k) particularly useful for owners and higher-earning employees who cannot contribute to a Roth IRA directly.

Who may benefit

Whether Roth or pre-tax contributions make more sense depends on each person's situation, but Roth contributions are often considered by:

• Younger employees who are in lower tax brackets now than they expect to be later
• Employees who expect their tax rate in retirement to be similar to or higher than today
• People who want a mix of taxable and tax-free money to draw on in retirement
• Higher earners who are not eligible for a Roth IRA

Employees should make that decision based on their own circumstances. The plan's job is to offer the option and explain it clearly.

What SECURE 2.0 changed

The SECURE 2.0 Act made several changes that affect Roth accounts in employer plans.

No required minimum distributions from Roth accounts in the plan. Beginning in 2024, Roth balances in employer plans are no longer subject to required minimum distributions during the participant's lifetime, matching the treatment of Roth IRAs.

Roth employer contributions. Plans may allow participants to elect to receive matching or nonelective employer contributions as Roth. These contributions must be fully vested and are included in the employee's taxable income for the year they are made.

Roth catch-up contributions for higher earners. This is the change that gets the most attention. Beginning in 2026, participants age 50 and older whose prior-year FICA wages from the employer exceeded an IRS-indexed threshold must make any catch-up contributions on a Roth basis. If a plan does not offer Roth contributions, those participants cannot make catch-up contributions at all.

For a small business owner who relies on catch-up contributions, that last point alone can be a reason to add the feature.

In-plan Roth conversions

Plans may also allow participants to convert pre-tax balances to Roth within the plan. The converted amount is taxable in the year of conversion. This feature is optional and separate from offering Roth contributions, so sponsors can decide on it independently.

Administrative considerations

Adding a Roth option is usually straightforward, but a few pieces need attention:

• Plan amendment. The plan document must be amended to permit Roth contributions.
• Payroll setup. Payroll needs a separate code for Roth deferrals so they are taxed correctly, and the recordkeeper needs to track Roth money separately.
• Catch-up coordination. For the higher-earner Roth catch-up rule, payroll and the recordkeeper need a reliable way to identify affected employees each year.
• Employee communication. Participants need a clear explanation of the difference between the two contribution types, without being told which one to choose.
• Rollovers. Roth 401(k) money can generally be rolled to a Roth IRA or another plan that accepts Roth rollovers.

Is there a downside to offering it?

For most plans, the added cost is modest and the main effort is setup and communication. Some employees may find the choice confusing at first, which is why clear education matters. Given the catch-up rule, plans with employees over age 50 have a strong practical reason to offer Roth contributions.

Communicating the choice

When you introduce a Roth option, a short explanation at enrollment and at annual employee meetings goes a long way. Side-by-side examples showing how the same contribution is taxed under each approach help employees understand the tradeoff without steering them toward one answer. Your recordkeeper likely has educational materials, and your advisor can help present them.

Want a second look at whether your plan's Roth features are set up correctly? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm meets with business owners to review plan design. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.

Frequently asked questions

Can an employee split contributions between pre-tax and Roth?

Yes, if the plan allows it. Most plans with a Roth option let employees choose any combination.

Do Roth contributions count toward the same annual limit as pre-tax contributions?

Yes. Pre-tax and Roth deferrals are combined for purposes of the annual deferral limit.

Does the employer match go into the Roth account?

Traditionally, employer contributions were always pre-tax. Under SECURE 2.0, a plan may allow participants to elect Roth treatment for employer contributions, but it is not required to.

This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.