Roth Option

A Roth Option is an option available within some employer-sponsored qualified retirement plans that allows for Roth tax treatment of employee contributions. The Roth option allows employees to deposit money into their retirement plans on an after-tax basis. This feature is available for both 401(k) and 403(b) plans. The Roth 401(k) option is available in more than 50% of company 401(k) plans.

The Roth option is appealing for highly compensated employees whose incomes are too high to permit Roth IRA contributions. Annual contributions can allow them to accumulate an enormous pool of tax-free cash by the time they retire.

The short answer is, not many people. This type of investment account is well-suited to people who think they will be in a higher tax bracket in retirement than they are now. The traditional 401(k) plan is funded with pretax money which results in a tax levy on future withdrawals.

Unlike a Roth IRA, there are no income limitations to participate. A Roth 401(k) is subject to contribution limits based on the individual’s age. For example, the contribution limit for individuals in 2018 is $18,500 per year. Individuals 50 and older can contribute an additional $6,000 in 2018  as a catch-up contribution, according to the IRS.

This might also appeal to those who are in low tax brackets now and expect to be in a much higher one later in life. The gains on your Roth 401(k) contributions are tax-free when you withdraw funds in retirement. Under IRS rules, any employer match must go into a tax-deferred 410(k). But the whole appeal of a 401(k) is tax deferral, which allows the account to grow even faster over the decades through compounding.

With a tax-deferred account, withdrawals before age 59.5 are subject to regular income tax and a 10% penalty. With the Roth version, there's no penalty or taxes on the contributed portion.  

Another option would be to split your contributions between the pre-tax and after-tax versions, hedging your bets and giving you the best features of both accounts. 

The 401(k) plan was enacted into law in 1978 and is named after the subsection of the Internal Revenue Service Code that established it. As of September 30, 2017, 401(k) plans accounted for roughly $5.3 trillion of the $27.2 trillion in total retirement plan assets in the United States, according to the Investment Company Institute. Total 401(k) plan balances have increased by more than 100% from 2008 to 2017.