It was authorized by the United States Congress under the Internal Revenue Code, section 402A,[1] and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan.
The same change in law allowed Roth IRA type contributions to 403(b) retirement plans.
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.
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).
Employers' matching funds are not included in the elective deferral cap but are considered for the maximum section 415 limit, which is $58,000 for 2021, or $64,500 for those age 50 and older.
[4] The higher section 415 limit also applies to after tax contributions, which, depending on the specific 401(k), might be convertible into a Roth 401(k) later.
(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, but income contributed to the traditional version is taxable in the year in which it is distributed from the account.
Adoption of Roth 401(k) plans has been relatively slow, partly because they require additional administrative recordkeeping and payroll processing.