Only 18% of investors use this retirement plan feature with tax-free growth

If you save inside a workplace plan, you are already doing one of the highest leverage money moves available. The part many people skip is choosing how those dollars are taxed. Your plan probably defaults you into pre-tax, which shrinks today’s taxable income. What gets missed is the Roth side of the menu. With Roth 401(k) contributions, you pay the tax now and let growth compound tax-free for decades. The feature is everywhere at this point and more people are quietly using it, but most workers still do not touch it despite how simple the change is. Vanguard’s latest data shows 86 percent of plans offered Roth at the end of 2024, and 18 percent of participants in those plans actually used it, both series highs in their long-running study.

Think of the choice like picking a lane in a driving app. Pre-tax is the route that avoids traffic today by reducing your current tax bill, but you pay the toll later when you withdraw in retirement. Roth is the route that pays the toll now, then lets you cruise later with no taxes on qualified withdrawals. Neither route is always better. The real question is which one gets you to your destination with fewer surprises given your current bracket, your likely future bracket, and how much control you want over required withdrawals.

The mechanics are straightforward. In 2025, you can defer up to 23,500 dollars of salary into your 401(k). If you are 50 or older, you can add a 7,500 dollar catch-up on top. Starting in 2025, there is also a special bump for ages 60 to 63, lifting that catch-up to 11,250 dollars if your plan supports it, since the law pegs it at 150 percent of the standard catch-up. These are hard limits, and your plan may cap things lower, but the headline numbers matter because they set the ceiling on how quickly you can build tax-advantaged space.

What do taxes look like down the road. With pre-tax, every dollar you pull in retirement counts as ordinary income. That does not just affect your bracket. It can ripple into higher Medicare income-related monthly adjustment amounts and make more of your Social Security taxable. With Roth 401(k) contributions, you already paid tax on the way in. If you follow the qualified distribution rules, your withdrawals come out tax-free. That can feel like flipping a switch on the complexity of retirement cash flow. The rules also changed in your favor. As of 2024, designated Roth accounts in employer plans no longer force required minimum distributions during your lifetime. The IRS makes this explicit in its guidance, which brings Roth 401(k) RMD treatment in line with Roth IRAs for the original owner.

This is where the conversation turns from product to planning. Imagine two workers with the same salary and savings rate. One is early career, expects pay raises, and sees a future with higher taxes either from income growth or policy changes. The other is late career, sitting on a large pre-tax balance, and plans to scale down hours in a few years. The first worker gets more obvious value from Roth 401(k) contributions because locking in today’s rate can be cheaper than tomorrow’s. The second worker might still use pre-tax to cut current taxes, then run a series of partial Roth conversions during lower-income years before Social Security starts. Both can be right. What matters is sequencing.

If you are age 60 to 63, the new higher catch-up makes Roth even more interesting. Treat that extra 3,750 dollars over the standard catch-up as a carve-out for tax-free fuel. If your plan lets you mix sources, you can keep your base deferral pre-tax for the current deduction and designate the age 60 to 63 catch-up as Roth to diversify your tax base at a faster clip. The law allows it, and many large plans are updating their recordkeeping to make this toggle clear. Keep in mind that a separate SECURE 2.0 rule would eventually require high earners to make catch-ups as Roth once the administrative delay ends. The IRS extended that enforcement window to 2026, which gives plans and payroll systems more time to adapt.

One more Roth advantage is clean estate logistics. If your spouse inherits a Roth 401(k) and rolls it properly, they can often treat it more flexibly. Most non-spouse beneficiaries, though, live under the 10-year rule. That means even inherited Roth accounts usually need to be emptied by the end of the tenth year after death, which keeps the tax benefits intact but compresses timing. The IRS has repeatedly clarified and finalized how this 10-year framework works, including when annual distributions apply and who counts as an eligible designated beneficiary with special treatment. The important part for you is to know that beneficiary choices interact with plan rules, and some employer plans can be stricter than the law’s baseline. Rolling to an inherited IRA may offer more options if the plan limits you.

So how do you choose the lane. Start by checking your actual marginal tax rate today. Not your average. The number that applies to your next dollar of income. If you are early in your career, in a lower bracket now, or expecting big raises, Roth 401(k) contributions often line up with common sense because you prepay tax at a discount. If you are in a top bracket with large equity compensation vesting this year, pre-tax can calm your current tax bill while you plan a conversion window later. The secret is that you are not locked into one choice forever. You can switch the toggle inside your plan’s contribution settings at any time, and many plans let you blend. A 70 to 30 split either way can be a realistic middle path while you gather more data on your career arc and tax exposure.

Next, map your required withdrawals. Even if your Roth 401(k) balance does not force RMDs during your lifetime, your pre-tax bucket will. The first RMD generally hits by April 1 of the year after you turn 73, with each year’s RMD due by December 31 after that. If you expect your pre-tax pile to be large, and you will have limited time before Social Security and any pension kick in, front-loading some Roth contributions now can reduce forced taxable income later. This is not about rate prediction games. It is about engineering flexibility so that future you is not boxed into a higher tax bracket only because the rules require you to draw more than you need.

Age matters for another reason. The 60 to 63 catch-up exists precisely because those four years are the last wide open window to accelerate savings before RMDs and retirement income start crowding your tax picture. Use that window if you can. If cash flow is tight, even redirecting a bonus into the plan for one year can max the special catch-up on the Roth side while keeping your baseline deferral steady. If cash flow is strong, consider pairing Roth 401(k) contributions with after-tax contributions and in-plan Roth conversions where your plan allows it. Vanguard notes a growing share of plans offer in-plan Roth conversions so you can convert after-tax dollars without moving money out. That is a different move than contributing Roth to begin with, but the end result is the same. You increase the share of your retirement money that will never be taxed again.

There is also the behavior side. Defaults are strong nudges. If your plan auto-enrolled you at a conservative deferral rate in pre-tax, it is easy to leave things untouched. Open the settings page and make conscious choices. Confirm whether your plan automatically escalates your rate each year. Look for a separate line where catch-up contributions can be designated pre-tax or Roth. Check the employer match rules so you do not accidentally miss free money by switching midyear. Switching to Roth does not change the employer match mechanics in most plans, but some systems display the flows in ways that confuse people. If anything looks off, ask HR or the recordkeeper to explain how the percentages map to dollars.

The top reason people hesitate on Roth is the upfront tax sting. That is real. If switching your whole deferral to Roth would cause you to underfund your emergency savings or take on credit card debt, do not do it all at once. Move part of your contribution to Roth and adjust over time. You can also use timing. If you have a month with less taxable income because of unpaid leave or a lower commission, temporarily crank up your Roth percentage. Many platforms let you schedule a rate change that only applies to the next paycheck.

Heirs and plan rules deserve one more pass. If you care about leaving a cleaner balance sheet, remember that Roth is simpler for the next person even if the 10-year clock still runs. And if you have a 401(k) and a Roth IRA, the Roth IRA is usually friendlier for beneficiaries. Employer plans can enforce stricter distribution schedules than the minimum allowed by law, and they can require faster cash-out. Several custodians and tax resources point out that non-spouse beneficiaries often have better options after rolling to an inherited IRA, especially if the employer plan forces an aggressive payout schedule. Leave clear beneficiary designations either way, and revisit them after major life events.

Here is the clean way to make the call without overthinking it. If you expect your earnings to rise meaningfully over the next five to ten years, or you want more control over taxes in retirement, tilt toward Roth 401(k) contributions now. If you are in a very high bracket only this year because of a one-time income spike, tilt pre-tax this year and revisit next year. If you are 60 to 63 and your plan allows it, use the higher catch-up and seriously consider putting that slice on the Roth side. If your plan supports in-plan conversions of after-tax contributions, use it to fill any extra space while you have the cash flow. And keep one eye on the IRS updates. Contribution limits adjust, enforcement dates can shift, and the rules around catch-ups for high earners have a delayed start to 2026 for Roth treatment. None of this should paralyze you. The toggles in your plan exist for a reason. Use them.

You do not need to be perfect to benefit. You just need to be consistent and intentional about which tax lane you are in. Roth 401(k) contributions are not magic. They are a design choice. If that choice fits your income path and retirement plan, it can turn future tax noise into a non-event. The more your savings compound, the more you appreciate what tax-free actually means. Your job is to make a decision that makes sense for your life now, then keep saving on autopilot.

Key sources for the numbers and rules in this guide include IRS releases on 2025 contribution limits, RMD timing, and Roth 401(k) RMD removal, along with Vanguard’s 2025 plan data on Roth availability and adoption. If you want to sanity check any single detail, start with the IRS page that lists the current 401(k) limits and the RMD FAQ, then skim the Vanguard report for the adoption trend.