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.