Which retirement plan allows employees to save with after-tax dollars that grow tax-free?

The Roth 401(k) plan is designed to allow employees to contribute after-tax dollars, meaning taxes are paid on the money before it is deposited into the retirement account. This feature is significant because it enables the investment to grow tax-free. As the funds accumulate over time, any qualified withdrawals taken in retirement—including both contributions and earnings—are not subjected to federal income tax.

This aspect of the Roth 401(k) makes it particularly appealing for individuals who anticipate being in a higher tax bracket during retirement compared to their current bracket. By paying taxes on contributions now, they can benefit from tax-free withdrawals later, maximizing their retirement income without the burden of future tax implications.

In contrast, other options listed, such as the Traditional 401(k) and Traditional IRAs, involve pre-tax contributions, deferring tax payments until withdrawal, resulting in taxable income during retirement. Simple IRAs also follow a similar taxation model as Traditional IRAs and 401(k)s. The Roth IRA, while it allows after-tax contributions that grow tax-free, is an individual account rather than an employer-sponsored retirement plan like the Roth 401(k).