Roth 401(k)s offer tax-free growth — but few workers use them

For many investors, workplace retirement plans build long-term savings via automatic paycheck deferrals. But most employees don’t make Roth contributions, which can grow tax-free. 

Some 86% of retirement plans, such as 401(k)s, offered Roth contributions in 2024, but only 18% of investors with the option participated, according to Vanguard’s 2025 analysis of more than 1,400 qualified plans and nearly 5 million participants.

That’s up slightly from 17% who made a Roth 401(k) contribution in 2023.

One reason for low adoption is that plans typically default to pre-tax contributions, meaning investors must switch to the Roth option, experts say.

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“I don’t know that people understand the benefits of the tax-free growth,” said certified financial planner Jordan Whitledge, lead advisor at Donaldson Capital Management in Evansville, Indiana. 

Younger or higher-income investors are more likely to make Roth contributions, according to the Vanguard report.

Here are some key things to know about Roth 401(k) contributions — and how to know if this option is right for you.

Most workplace retirement plans offer two choices for employee deferrals: pre-tax or after-tax Roth. (A smaller percentage of plans also offer after-tax contributions, which are different from Roth, and allow big savers to exceed the employee deferral limit.)  

For 2025, you can defer up to $23,500 into your 401(k), plus an extra $7,500 in “catch-up contributions” if you’re age 50 and older. That catch-up contribution jumps to $11,250 for investors aged 60 to 63.

While pre-tax contributions offer an upfront tax break, you’ll owe regular income taxes on withdrawals in retirement, depending on your tax bracket.

Pre-tax funds are subject to required minimum distributions, known as RMDs, or you may face an IRS penalty. The first deadline for RMDs is April 1 of the year after you turn 73, and Dec. 31 is the due date for future years.

By comparison, Roth contributions are after-tax, but your balance grows tax-free. For Roth accounts, the original account owner won’t face RMDs, but certain heirs are subject to the 10-year rule, meaning the account must be emptied within 10 years of the original owner’s death.

For some investors, especially for those with a large pre-tax balance, RMDs can be a pain point in retirement, Whitledge said.

This can also be an issue for heirs who may have to empty pre-tax accounts and boost their adjusted gross income during their peak earning years, experts say.

While tax-free growth may be appealing, you should consider your broader tax plan before picking Roth contributions, experts say.  

“Many financial advisors recommend a mix if possible, but prioritizing based on your current tax bracket and expected future rates,” said CFP Mike Casey, president of American Executive Advisors in McLean, Virginia.

If you expect higher tax rates in retirement, “Roth options shine for locking in today’s rates,” he said.