2. Roth 401(k) Distributions

Many employers now offer a Roth option within their standard 401(k) or 403(b) retirement plans. A Roth 401(k) operates on the same basic principle as a Roth IRA: you contribute after-tax money, the funds grow tax-free, and qualified withdrawals are tax-exempt.

The primary advantage of a Roth 401(k) over a Roth IRA is the contribution limit. As of current tax laws, you can funnel significantly more money into a workplace plan than you can into an individual IRA. This allows high earners to build a massive reservoir of tax free retirement income relatively quickly.

Historically, Roth 401(k)s had one major drawback compared to Roth IRAs: they were subject to Required Minimum Distributions. However, recent legislative changes have eliminated this burden. Starting in 2024, under the SECURE 2.0 Act, Roth accounts in employer retirement plans are exempt from RMD requirements during the original owner’s lifetime. This change perfectly aligns the Roth 401(k) with the Roth IRA, granting you total control over when and how you access your money.