89% of small employers that offer a retirement plan say it helps them hire and retain workers, according to a Pew survey. It’s no doubt an attractive benefit. But with payroll deduction IRAs, safe harbor 401(k)s, profit sharing, and more, there are many options for employers to choose from, each with their pros and cons.
An increasing popular option, the Roth 401(k) combines elements of both a traditional 401(k) and a Roth IRA. Learn more about a Roth 401(k) to determine whether it’s the best fit for your business.
What is a Roth 401(k)?
A Roth 401(k) is a retirement savings account in which contributions are deducted from a paycheck after-tax. Withdrawals in retirement are tax-free, meaning the account holder doesn’t pay taxes on their contributions or any investment growth, including earned interest
Pros and Cons of a Roth 401(k)
A Roth 401(k) offers advantages for both the employer and the employee. Pros include:
- Tax-free growth: Once an employee contributes after-tax dollars to a Roth 401(k), the money grows tax-free, meaning investment earnings, including interest and capital gains, can be withdrawn tax-free during retirement.
- Lower tax bracket: Typically an employee is in a lower tax bracket when they start contributing than they will be at retirement. By paying taxes on their contributions upfront, they avoid paying potentially higher taxes on withdrawals in retirement.
- No income limits: Unlike a Roth IRA, which restricts contributions based on income, a Roth 401(k) has no income limit.
- Tax-deductible employer contributions: Employer contributions to an employee’s Roth 401(k) are deductible on the employer’s federal income tax return, which reduces their taxable income.
- Automatic enrollment feature: Employers can boost plan participation rates with automatic enrollment.
Cons include:
- Immediate tax hit: Employee contributions to a Roth 401(k) are made with after-tax dollars, meaning employees take a reduction in their take-home pay.
- Recordkeeping: Employers may need to adjust their systems to handle after-tax contributions, which requires accurate recordkeeping.
- Required education: Employees may need more education to fully understand the Roth 401(k). While employee contributions are post-tax, employer contributions are pre-tax.
Roth 401(k) Contribution Limits
Roth 401(k) contribution limits are the same as traditional 401(k) limits for 2025. The limit is $23,500 for the employee, plus a catch-up contribution of up to $7,500 for employees age 50 or over. Employers can match employee contributions. Generally, those matches are pre-tax and go into a traditional 401(k). With the SECURE Act 2.0, employers now have the option to direct matches into a Roth 401(k) account.
Comparing Retirement Account Types
Giving employees options for their retirement savings accounts allows them to select a plan that aligns with their financial goals and retirement strategies. The key differences between a Roth 401(k), traditional 401(k), and Roth IRA are:
| Feature | Traditional 401(k) | Roth 401(k) | Roth IRA |
|---|---|---|---|
| Employee contributions | Pre-tax | After-tax | Pre-tax |
| Contribution limit | $23,000 ($30,500 with catch-up) | $23,000 ($30,500 with catch-up) | $7,000 ($8,000 with catch-up) |
| Income limit | None | None | $240,000 for filing married, or $161,000 for single filers |
How Paycor Helps
From recordkeeping to payroll reporting, 401(k) management is extremely taxing for HR departments. And to top it off, regulations and limits often change from year to year.
For example, the SECURE Act 2.0 implemented changes that went into effect for tax year 2023. Section 604 of the SECURE Act 2.0 allows employees to designate certain matching and nonelective retirement account contributions made after Dec. 29, 2022 as Roth contributions — meaning the contributions are not subject to withholding for federal income tax, Social Security, or Medicare tax.
To reduce complexity, check out Paycor’s Benefits Administration Software for plan management and payroll compliance solutions. Our team of tax and benefits professionals work behind the scenes to ensure accurate and compliant payroll for your business.
Take a guided software tour to see Paycor solutions in action.