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Most people ignore a powerful retirement tool: The Roth 401(k)

A report from Vanguard found 80% of employers offer one

Updated:

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By:
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Mark Huffman
Reporter

Mark Huffman has covered consumer issues since 2004, with a special focus on protecting and empowering older adults. A former news correspondent for the Associated Press Radio Network, Westwood One, and ConsumerAffairs, Mark brings decades of journalistic experience to RetirementLiving.com. He is passionate about giving consumers a voice and helping them make informed decisions. Mark has also created educational content, including Senior Scam Alert, a video resource designed to help seniors recognize and avoid fraud. He holds a B.A. from the University of Kentucky and lives with his family in Richmond, Virginia.
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Key Insights

  • More than 85% of employers offer a Roth 401(k) option, but fewer than 20% of workers use it.
  • A Roth 401(k) allows for tax-free withdrawals in retirement, unlike traditional 401(k) accounts.
  • Choosing a Roth 401(k) can provide greater tax flexibility and help manage costs in retirement.

If your employer offers a retirement plan, chances are you have access to one of the best savings options available, but most people aren’t taking advantage of it. 

According to new data from Vanguard, more than 85% of 401(k) plans include the option to contribute to a Roth 401(k). Yet fewer than one in five employees who have this choice are using it.

That gap has financial experts puzzled. During the annual open enrollment period, when workers review and update their benefits for the coming year, many may be missing an opportunity to set themselves up for more tax-efficient retirement income.

What makes a Roth 401(k) different

The key difference between a Traditional 401(k) and a Roth 401(k) comes down to when you pay taxes.

  • With a Traditional 401(k), contributions reduce your taxable income in the year you make them. For instance, if you earn $85,000 and contribute $10,000, you’re taxed as though you earned $75,000. However, withdrawals in retirement are fully taxable, and you’ll eventually be required to take distributions starting at age 73 (for those born between 1951 and 1959) or 75 (for those born in 1960 or later).
  • With a Roth 401(k), contributions are made with after-tax dollars. That means you don’t get an upfront tax break, but once you retire, your withdrawals—including all investment gains—are completely tax-free. There’s also no required minimum distribution, so your money can stay invested as long as you like.

Why Roth contributions can pay off later

Financial planners increasingly recommend diversifying retirement savings between pre-tax and after-tax accounts. For workers who have long contributed to a Traditional 401(k), shifting new contributions to a Roth 401(k) starting in 2026 could offer long-term benefits.

Tax-free income in retirement can help keep your overall taxable income lower, potentially reducing Medicare Part B premiums and even limiting the taxes owed on Social Security benefits. It also provides more flexibility to manage your income from year to year, depending on your needs and the tax environment.

While a Traditional 401(k) remains a solid retirement tool, adding Roth savings – through either a Roth 401(k) or a Roth IRA – can be a smart way to build financial flexibility for the future. As open enrollment season approaches, now is an ideal time for employees to review their plan options and consider making the switch.

According to personal finance expert Suze Orman, the Roth 401(k) may be the best retirement benefit you’re not using.