The mechanical difference in one paragraph
A traditional 401(k) contribution is deducted from taxable income today, grows tax-deferred, and is taxed as ordinary income when it comes out. A Roth 401(k) contribution is made with money that has already been taxed, grows the same way, and comes out tax-free in retirement — including every dollar of growth.
Same contribution limit, same investment menu, same employer match, same payroll process. The only thing that changes is when the tax is paid.
Why the "which is better" debate usually misses the point
The textbook answer is that if your tax rate today equals your tax rate in retirement, the two are mathematically identical. That is true, and it is also why the comparison gets dismissed too quickly.
The reason a Roth option matters in practice is that nobody knows their retirement tax rate, and the two accounts fail in opposite directions. A traditional balance is worth less than the statement says — some of it belongs to the IRS, and the fraction depends on tax law decades from now. A Roth balance is worth exactly what the statement says.
Giving employees both means the household can decide how much of that uncertainty to carry, and can draw from whichever account is cheaper in a given year of retirement.
- →Younger employees in low brackets today are the clearest beneficiaries — they pay tax at a rate they may never see again.
- →High earners expecting large required minimum distributions later can use Roth dollars to keep future taxable income down.
- →Roth 401(k) balances have no income limit, unlike a Roth IRA — this is often the only Roth access a high earner has.
- →Since SECURE 2.0, Roth 401(k) accounts are no longer subject to required minimum distributions for the original owner.
What it costs the business
For most plans: a plan amendment and a payroll configuration change. Nearly every major recordkeeper supports Roth deferrals, and the large majority of plans now offer them — a plan without the option is increasingly the exception rather than the norm.
The employer match is unaffected by the employee's choice. Under SECURE 2.0, plans may also permit employer contributions to be made on a Roth basis, but that is a separate, optional design decision and carries its own payroll and reporting work.
The real implementation cost is communication. An option employees do not understand does not get used, and an unused option is worth nothing.
The catch-up contribution rule that forces the issue
SECURE 2.0 requires catch-up contributions for higher-paid employees — those over a wage threshold indexed annually — to be made on a Roth basis. A plan with no Roth option cannot accept those catch-up contributions at all.
For plans with older, well-compensated participants, this turns a nice-to-have into a design gap that removes a benefit from exactly the employees most likely to notice. If your plan has no Roth feature, this is worth raising with your recordkeeper and ERISA counsel now rather than at renewal.
Questions to ask before you add it
Adding the feature is straightforward, but a few answers are worth having in writing first.
- →Does our recordkeeper support Roth deferrals today, and at what additional cost — if any?
- →Can our payroll provider handle a second deferral type without manual reconciliation each period?
- →Will the plan document need a formal amendment, and what is the effective-date timing?
- →Do we want to permit in-plan Roth conversions, or only ongoing Roth deferrals?
- →What is the employee education plan — and who is delivering it?