The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. As of January 1, 2006 U.S. employers have been free to amend their 401(k) plan document to allow employees to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions. The same change in law allowed Roth IRA type contributions to 403(b) retirement plans. The Roth retirement plan provision was enacted as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001).
Traditional 401(k) and Roth IRA plans 
In a traditional 401(k) plan, introduced by Congress in 1978, employees contribute pre-tax earnings to their retirement plan, also called "elective deferrals". That is, an employee's elective deferral funds are set aside by the employer in a special account where the funds are allowed to be invested in various options made available in the plan. The IRS sets a limit on the amount of funds deferred in this way, and includes a "catch up" provision intended to allow older workers to save for their approaching retirement. These limits are adjusted each year to reflect changes in the cost of living due to inflation. For tax-year 2012 this limit is $17,000 for those under age 50, and $22,500 for those 50 and over. The limits for tax year 2013 will be $17,500 and $23,000, respectively.
Employers may also add funds to the account by contributing matching funds on a fractional formula basis (e.g., matching funds might be added at the rate of 50% of employees' elective deferrals), or on a set percentage basis. Funds within the 401(k) account grow on a tax deferred basis. When the account owner reaches the age of 59½, he or she may begin to receive "qualified distributions" from the funds in the account; these distributions are then taxed at ordinary income tax rates. Exceptions exist to allow distribution of funds before 59½, such as Substantially equal periodic payments, disability, and separation from service after the age of 55, as outlined under IRS Code section 72(t).
Under a Roth IRA, first enacted in 1998, individuals, whether employees or self-employed, voluntarily contribute post-tax funds to an individual retirement arrangement (IRA). In contrast to the 401(k) plan, the Roth plan requires post-tax contributions, but allows for tax free growth and distribution, provided the contributions have been invested for at least 5 years and the account owner has reached age 59½. The amounts of income that can be invested in a Roth IRA are significantly more limited than those to a 401(k) are. For 2012, individuals are limited to contributing no more than $5,000 to a Roth IRA if under age 50, and $6,000 if age 50 or older. Additionally, Roth IRA contributions are prohibited when taxpayers earn a Modified Adjusted Gross Income of more than $110,000, ($160,000 for married filing jointly). See 401(k) versus IRA matrix that compares various types of IRAs with various types of 401(k)s.
The Roth 401(k) plan 
The Roth 401(k) combines some of the most advantageous aspects of both the 401(k) and the Roth IRA. Under the Roth 401(k), employees can decide to contribute funds on a post-tax elective deferral basis, in addition to, or instead of, pre-tax elective deferrals under their traditional 401(k) plans. An employee's combined elective deferrals-- whether to a traditional 401(k), a Roth 401(k), or to both-- cannot exceed the IRS limits for deferral of the traditional 401(k). Employer's matching funds are not included in the elective deferral cap but are considered for the maximum section 415 limit, which is $51,000 for 2013.
Employers are permitted to make matching contributions on employees' designated Roth contributions. However, employers' contributions cannot receive the Roth tax treatment. The matching contributions made on account of designated Roth contributions must be allocated to a pre-tax account, just as matching contributions are on traditional, pre-tax elective contributions. (Pub 4530)
In general, the difference between a Roth 401(k) and a traditional 401(k) is that income contributed to the Roth version is taxable in the year it is earned, while income contributed to the traditional version is taxable in the year it is distributed from the account. Furthermore, earnings on the traditional version are taxable income in the year they are distributed, while earnings on the Roth version are not taxable ever.
There are restrictions on the nontaxability of Roth earnings: typically, the distribution must be made at least 5 years after the first Roth contribution and after the recipient is age 59½.
A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA, for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. Higher-income workers who wish to save the maximum amount allowed may favor the Roth 401(k) because it effectively allows greater real contributions, as post-tax dollars are more valuable than pre-tax dollars; however, those near the Roth IRA income limits may prefer a traditional 401(k), since its pre-tax contributions lowers Modified Adjusted Gross Income (MAGI) and thus increases eligibility for Roth IRA contributions. Another consideration for those currently in higher tax brackets is the future of income tax rates in the U.S. (if income tax rates increase, current taxation would be desirable for a wider group). The Roth 401(k) offers the advantage of tax free distribution, but is not constrained by the same income limitations. For example, in tax year 2013, normal Roth IRA contributions are limited to $5,500 ($6500 if age 50 or order); whereas, up to $17,500 could be contributed to a Roth 401(k) account, provided no other elective deferrals were taken for the tax year (no traditional 401(k) deferrals taken).
Adoption of Roth 401(k) plans has been relatively slow, and stated reasons for this include the fact that they require additional administrative recordkeeping and payroll processing. However some larger firms have now adopted Roth 401(k) plans, and this is expected to spur their adoption by other firms including smaller ones.
Additional considerations 
- Roth 401(k) contributions are irrevocable, such that once money is invested into a Roth 401(k) account; it cannot be moved to a regular 401(k) account.
- Employees can roll their Roth 401(k) contributions over to a Roth IRA account upon termination of employment.
- It is the employer's decision whether to provide access to the Roth 401(k) in addition to the traditional 401(k). Many employers find that the added administrative burden outweighs the benefits of the Roth 401(k).
- The Roth 401(k) program was originally set up to sunset, or no longer be in place, after 2010 along with the rest of EGTRRA 2001. The Pension Protection Act of 2006 extended it.
- Unlike Roth IRAs, owners of Roth 401(k) accounts (designated Roth accounts) must begin distributions at age 70 and a half, as with IRA and other retirement plans. (Pub 4530)
See also 
- Comparison of 401(k) and IRA accounts - 401k & IRA comparisons (401k vs Roth 401k vs Traditional IRA vs Roth IRA)
- Individual Retirement Account
- Internal Revenue Service
- Rollovers as Business Start-Ups
- Self-Directed IRA