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

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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.

“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.

How Roth 401(k) contributions work

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.