What Is A Roth Deferral? (How It Works, Limits & Benefits)

Roth deferrals work differently. You contribute after taxes have been paid. If you meet IRS requirements, your withdrawals in retirement will be completely tax-free.

If you are trying to figure out what a Roth deferral is, how it works, and whether it may be a good fit for your retirement plan, this guide will walk through the basics step by step.

What Is a Roth Deferral?

A Roth deferral refers to after-tax contributions made by an employee to a designated Roth account inside a 401k or 403b plan. Unlike traditional contributions, these amounts do not reduce your taxable income for the year. You pay taxes upfront, and the deferrals are deposited into your Roth account.

📝 Note: If you withdraw early or do not meet both IRS rules, your earnings could be taxed and penalized. The original contributions themselves are not taxed again.

✏️ Hypothetical Example:

Let’s say you contribute a total of $50,000 to your Roth 401k over time. By retirement, your account grows to $5 million.

This example is hypothetical and for illustration only. Actual outcomes will vary, and investment growth is never guaranteed.

Where Roth Deferrals Are Used

The most common retirement plans that support Roth deferrals include:

✅ Corporate 401k plans
✅ Solo 401k plans for self-employed individuals
✅ Certain 403b plans offered by public schools and nonprofits

These accounts are designed for long-term retirement savings. If you are self-employed or run a business, having direct check-writing authority over your Solo 401k may give you more flexibility in how you manage contributions.

Roth Deferral Limits for 2025

For 2025, employees can contribute up to:

These limits apply across all 401k plans combined. For example, if you contribute to both a day-job 401k and a Solo 401k for your side business, your total employee deferrals across both must stay within the annual IRS limit.

📝 Keep in mind: To contribute the full amount, your income must be high enough to support it. The actual amount you can defer depends on your:

Roth Deferrals vs. Roth IRA Contributions

Although they sound similar, Roth deferrals and Roth IRA contributions follow different rules.

Roth 401k Deferrals	Roth IRA Contributions
Made through an employer-sponsored plan	Made through an individual account
Contribution limits tied to 401k plan rules	Separate IRS limit applies
No income restrictions for eligibility	Income limits apply for eligibility
RMD rules may apply (unless rolled over)	No RMDs required during your lifetime

Roth deferrals are tied to workplace plans. They are made through payroll and reported by your employer. Roth IRAs are personal accounts you open directly and fund separately.

📝 Note: The two accounts are not connected. You can contribute to both in the same year, if you are eligible.

Employer Matching Rules

Until recently, only employees could make Roth deferrals, and any employer matching contributions were required to be made with pre-tax dollars. That changed with the SECURE 2.0 Act.

Starting in 2023, employers are now allowed to offer Roth treatment for their matching or nonelective contributions. However, the employee must actively elect this treatment, and any Roth employer contribution is considered taxable income in the year it is deposited. These amounts are reported on Form 1099-R, even though you do not actually receive the funds directly.

📝 Note: Not all plans offer Roth matching yet. Employers must choose to include this feature, and employees must opt in.

Here’s how traditional and Roth deferrals compare across key plan features:

Feature	Traditional Deferrals	Roth Deferrals
Contributions	Pre-tax. These reduce your taxable income for the year.	Post-tax. These are included in your taxable income and are not deductible.
Who Contributes?	Employees make pre-tax salary deferrals. Employers can add pre-tax matching or nonelective contributions.	Employees make Roth deferrals. Employers may allow employees to elect Roth treatment for matches.
Employer Match	Matches are made with pre-tax dollars.	If the plan permits, employees can elect Roth treatment. These are taxable and reported on Form 1099-R.
Contribution Limit (2025)	$23,500 limit on employee deferrals; $31,000 if age 50 or older (includes $7,500 catch-up).	Same limit applies — combined across Roth and traditional deferrals.
Taxes on Contributions	Not taxed when contributed. Taxed as ordinary income when withdrawn.	Taxed in the year contributed. Qualified withdrawals may be entirely tax-free.
Withdrawals	Taxed as ordinary income. No penalty after age 59½.	Qualified withdrawals are tax-free if age 59½ and 5-year rule is met.
Qualified Distributions	Allowed after age 59½ without penalty, but taxed.	Must be age 59½ and meet the 5-year rule to be tax-free.
Required Minimum Distributions (RMD)	Begin at age 73 for most traditional accounts.	No RMDs for Roth 401k owners starting in 2024. Beneficiaries may still have RMDs.

Who Should Consider Roth Deferrals?

Roth deferrals are not always the right move for everyone. But depending on your income, tax goals, and long-term outlook, they could be worth considering.

When Roth Deferrals Might Make Sense

If your current income is moderate and you expect it to grow over time, Roth contributions could offer more long-term tax flexibility. Since you pay taxes today and not later, this strategy is often useful for those in the early or mid-stage of their careers.

✅ You expect to be in a higher tax bracket later. Paying taxes now may cost you less than paying them later, especially if your income increases or tax rates rise in the future.

✅ You want tax-free income in retirement. Qualified Roth withdrawals, taken after age 59½ and after holding the account for five years, are not taxed. This may help reduce your taxable income in retirement.

✅ You do not need a deduction this year. If your current tax liability is low, the value of a traditional 401k deduction may not be meaningful to you right now.

✅ You want to maximize compounding potential. Retirement accounts like a Solo 401k allow tax-deferred or tax-free compounding, depending on how you contribute. If you start early and stay invested, the tax-free nature of Roth withdrawals could offer long-term benefits.

📝 Note: Growth is never guaranteed. These strategies are designed for retirement, and all investing involves risk.

When Roth Deferrals Might Not Be a Fit

In some cases, it may be more beneficial to lower your taxable income today, especially if you expect to be in a lower tax bracket later.

❌ You want to reduce your current tax bill. If tax savings are a priority this year, traditional deferrals may offer more value. For example, this can be applied if you want to stay under an income threshold.

❌ You expect your income to drop in retirement. If your retirement income will likely be much lower, deferring taxes until then might result in a lower effective tax rate.

❌ You are unsure about long-term growth. If you do not anticipate significant earnings in your account or plan to use the money early, the benefit of Roth tax-free withdrawals may be limited.

How Roth 401k Withdrawals Work

The biggest advantage of Roth deferrals shows up when it is time to take money out. But not all withdrawals are treated the same. Timing and qualification rules make a big difference.

Qualified Roth Withdrawals

A qualified withdrawal from a Roth 401k is not taxed if you meet both of the following conditions:

✅ You are at least age 59½
✅ Your Roth 401k account has been open for at least five years

Once both requirements are met, you can take withdrawals that include both contributions and earnings without paying any taxes. This is one of the main reasons some people prefer Roth deferrals over traditional ones.

What Happens If You Withdraw Early?

Withdrawals before age 59½ are typically considered nonqualified. In that case:

However, the IRS does offer exceptions for certain situations like permanent disability or qualified first-time home purchases. Be sure to review the official rules or talk to a tax professional before making an early withdrawal.

📝 Note: The 5-year rule starts on January 1 of the year you make your first Roth deferral — not when each contribution is made.

Required Minimum Distributions (RMDs)

In the past, Roth 401k accounts were subject to required minimum distributions once you reached a certain age. That changed starting in 2024.

✅ As of 2024, Roth 401k accounts no longer require RMDs for the original account owner
❌ Beneficiaries may still have to take distributions after inheritance

This change aligns Roth 401k treatment more closely with Roth IRAs, which have never required RMDs for the original account holder.

Roth 401k Rollovers

If you leave your job or retire, you can roll over your Roth 401k to a Roth IRA. This may give you more control and flexibility, especially when it comes to investment choices and distribution timing.

Here’s how rollovers work:

Type of Rollover	Is it Taxable?	RMDs Apply?
Roth 401k ➝ Roth IRA (direct rollover)	❌ Not taxable	❌ No RMDs for owner
Roth 401k ➝ Roth IRA (indirect rollover)	❌ Not taxable, but 60-day rule and withholding may apply	❌ No RMDs for owner
Traditional 401k ➝ Roth IRA (Roth conversion)	✅ Taxable	❌ No RMDs after rollover

📝 Note: A direct rollover is the cleaner and safer method. Funds go straight from the plan provider to the Roth IRA custodian, avoiding unnecessary tax complications or deadlines.

Wrapping Up

Roth deferrals give you the chance to pay taxes today in exchange for tax-free withdrawals later if you follow the IRS rules. You will find this option in most workplace retirement plans, including a 401k, Solo 401k, and certain 403b plans.

Unlike traditional deferrals, Roth contributions do not reduce your taxable income for the year. But once you reach age 59½ and meet the five-year rule, qualified withdrawals are not taxed.

This approach may work well if you expect your income to grow, or if you prefer more certainty around future taxes. It depends on your current income, tax bracket, and long-term retirement plans.

---

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.
To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form ADV Part 2A brochure and Form CRS or through the SEC’s website at www.adviserinfo.sec.gov.