Traditional vs Roth 401(k) Contribution Limits

Like individual retirement accounts, 401(k)s are available as either traditional and Roth accounts. Both types have the same annual employee and employer contribution limits.

Traditional 401(k)s

A traditional 401(k) lets you deduct the amount of your total employee contributions from your taxable income each year. In broad terms, this means if you made $50,000 and contributed $5,000 to your traditional 401(k), you would be taxed as if you made $45,000. In retirement or after age 59 ½, you pay income taxes on withdrawals based on your marginal tax rate at that time.

Roth 401(k)s

With a Roth 401(k), you contribute money on which you’ve already paid taxes. Withdrawals made after age 59 ½ are tax-free, as long it has been at least five years since your first contribution. Roth 401(k)s come with a few caveats:

• Not all employers offer Roth 401(k)s, although their prevalence is rapidly increasing.

• If your company offers a 401(k) match, some—but not all—plans allow you save it in a Roth account. Some plans may still require employer matching contributions to be saved in a traditional 401(k) account.

• Unlike Roth IRAs, Roth 401(k)s have no income restrictions, meaning anyone with access to a Roth 401(k) may contribute to it.

Starting in 2024, Secure Act 2.0 mandated that catch-up contributions to 401(k) plans must be made to Roth accounts for employees earning more than $145,000 a year.