Account Types at a Glance

• Roth 401(k) (designated Roth account in a 401(k), 403(b), or governmental 457(b))

  • Contributions are made after tax and included in gross income in the year contributed; qualified distributions (after a 5‑taxable‑year period and upon age 59½, death, or disability) are tax‑free, including earnings Retirement plans FAQs on designated Roth accounts.

  • Employers must maintain a separate designated Roth account and separately track contributions and earnings Retirement plans FAQs on designated Roth accounts.

• Traditional 401(k)

  • Elective deferrals are excluded from current gross income (but subject to FICA/FUTA); withdrawals are taxable as ordinary income when distributed 401(k) plans; 401(k) plan overview.

• Taxable Brokerage Account

  • No contribution limits and no RMDs; ongoing taxation of dividends and interest, and capital gains on sales; rules for investment income (interest, dividends, OID), capital gains, and wash sales apply Publication 550; Topic No. 403.

Contributions, Limits, and Employer Match

• Elective deferral limits (all 401(k) deferrals—traditional and Roth combined): $23,000 for 2024; catch‑up permitted for age 50+ (additional amount). Check the latest annual limits and catch‑up amounts under Retirement Topics – Contributions Retirement topics – Contributions.

• Employers may offer matching or nonelective contributions (subject to plan terms and nondiscrimination rules); match formulas and vesting differ by plan design (traditional, safe harbor, SIMPLE 401(k)) Operating a 401(k) plan; 401(k) plan overview.

• Designated Roth contributions are allowed only in plans that include the Roth feature; contributions are includible in gross income when made Retirement plans FAQs on designated Roth accounts.

• Traditional 401(k) elective deferrals reduce current taxable income; they are reported as deferred wages for income tax, but still count for FICA and FUTA 401(k) plan overview.

Taxation of Growth and Distributions

• Roth 401(k)

  • Qualified distribution requirements: distribution must occur after a 5‑taxable‑year period of participation and meet a qualifying event (age 59½, death, disability); qualified distributions are not includible in gross income Retirement plans FAQs on designated Roth accounts.

  • Nonqualified distributions: contributions (basis) come out tax‑free; earnings portion is taxable in gross income Retirement plans FAQs on designated Roth accounts.

• Traditional 401(k)

  • Distributions are generally taxable as ordinary income; early distributions may incur a 10% additional tax unless an exception applies (e.g., age 59½, death, disability, substantially equal periodic payments) Topic No. 410; Publication 575.

• Rollovers

  • Eligible rollover distributions from qualified plans may be excluded from current income if rolled to an eligible retirement plan within 60 days or via direct rollover; 20% mandatory withholding applies to most taxable distributions paid directly to the participant unless a direct rollover is elected Topic No. 412; 26 U.S.C. § 402(c).

• In‑Plan Roth Rollovers

  • Plans may allow transfers of untaxed amounts from other plan accounts into the designated Roth account; previously untaxed amounts are includible in gross income in the year of the rollover Roth account in your retirement plan.

• Loans and Early Distribution Rules

  • Plan loans and deemed distributions are governed by § 72(p) and regulations; failure to repay per terms can trigger deemed distributions and tax 26 CFR § 1.72(p)‑1.

  • Early distribution exceptions and additional tax mechanics for pensions and annuities are summarized by Topic 410 Topic No. 410; see also Publication 575.

Required Minimum Distributions (RMDs)

• The RMD framework for qualified plans and IRAs is set by § 401(a)(9); the required beginning date changed under recent legislation. For most taxpayers who turned age 73 in 2024, the first RMD is due by April 1, 2025; subsequent RMDs are due by December 31 each year 26 U.S.C. § 401(a); Retirement topics—RMDs.

• Designated Roth accounts are subject to plan RMD rules during the owner’s lifetime, but qualified distributions may be tax‑free; consult plan terms. IRA RMD rules (tables, calculations) are in Publication 590‑B Publication 590‑B; Retirement topics—RMDs.

Taxable Brokerage Accounts: Income, Gains, and Loss Rules

• Interest and Dividends

  • Most interest is taxable in the year received or credited; certain interest (e.g., municipal bond interest) is tax‑exempt but still reported Topic No. 403.

  • Publication 550 covers interest (including OID), dividends, and reporting details (Forms 1099‑INT, 1099‑OID) Publication 550.

• Capital Gains

  • Gains or losses are realized on sales or exchanges; long‑term vs. short‑term treatment depends on holding period; reporting generally via Form 8949 and Schedule D Publication 550; Form 8949.

• Wash Sale Rule

  • Disallows loss deductions when substantially identical securities are acquired within 30 days before or after the sale; Publication 550 explains wash sales and basis adjustments Publication 550.

• No RMDs and no contribution limits apply to taxable accounts; however, ongoing tax drag from interest and dividends and realization of capital gains affects after‑tax returns compared to tax‑advantaged plans Publication 550.

Employer Plan Administration and Compliance (Relevant to Business Owners)

• Plan operation must satisfy eligibility, contribution, vesting, and nondiscrimination rules; disclosure and reporting obligations (e.g., SPD, Form 5500 series) apply Operating a 401(k) plan.

• Safe harbor and SIMPLE 401(k) designs alter testing and required employer contributions; employee elective deferrals are always 100% vested Operating a 401(k) plan; 401(k) plan overview.

Rollovers, Roth Conversions, and Basis

• Qualified plan rollovers: Eligible rollover distributions can be moved to IRAs or another plan; special rules apply to net unrealized appreciation (NUA) of employer securities, and hardship distributions are not eligible Topic No. 412; 26 U.S.C. § 402(c).

• Roth 401(k) rollovers

  • Direct rollover from a designated Roth account to another plan’s designated Roth account must be a direct trustee‑to‑trustee transfer; distribution to the participant rolled within 60 days can go to a Roth IRA, but basis and 5‑year clock rules differ Retirement plans FAQs on designated Roth accounts.

• Basis tracking in Roth accounts

  • Plans must separately account for designated Roth contributions and earnings; the 5‑taxable‑year period begins with the first year of designated Roth contributions to the plan (subject to rollover rules) Retirement plans FAQs on designated Roth accounts.

Early Distribution Penalties and Exceptions

• A 10% additional tax may apply to early distributions (before age 59½) from qualified plans; exceptions include death, disability, and substantially equal periodic payments (SEPP); details and exceptions are in Topic 410 and Publication 575 Topic No. 410; Publication 575.

Comparative Tax Features

Feature Roth 401(k) Traditional 401(k) Taxable Brokerage Contribution tax treatment After‑tax; included in income Pre‑tax; excluded from current income No special tax treatment Investment taxation Tax‑free growth if distributed in a qualified distribution Tax‑deferred growth; taxed when distributed Ongoing taxation of interest/dividends; capital gains on sale Publication 550 Distribution taxation Qualified distributions tax‑free; nonqualified distributions tax earnings portion Ordinary income Capital gains rates; interest/dividends per general rules Publication 550 RMDs Plan RMDs apply; qualified distributions may be tax‑free 26 U.S.C. § 401(a) RMDs apply; taxable None Limits Combined Roth+traditional deferral limits apply Retirement topics – Contributions Same as Roth None Employer match Allowed; match typically pre‑tax account unless plan permits Roth match option Operating a 401(k) plan Allowed N/A

Planning Considerations for S‑Corp/LLC Owners

• Compensation and payroll: Traditional deferrals reduce current income tax but not FICA/FUTA; Roth deferrals do not reduce current income taxes. Business owners should coordinate salary, elective deferrals, and employer contributions with plan terms and cash flow 401(k) plan overview.

• RMD timing: Owners nearing the RMD age must plan distributions from traditional accounts to manage tax brackets; Roth designated account qualified distributions may reduce taxable income in retirement (subject to plan RMD rules) 26 U.S.C. § 401(a); Publication 590‑B.

• Taxable account strategies: Tax‑loss harvesting, timing of gains, and asset location can improve after‑tax returns compared to holding the same assets in accounts with ordinary‑income taxation on withdrawal Publication 550.

Practical Examples

• Example A (Roth 401(k)): A 50‑year‑old contributes $23,000 to a designated Roth account. The plan tracks the 5‑taxable‑year period starting January 1 of the contribution year. At age 60 (more than 5 years later), a distribution of earnings is tax‑free as a qualified distribution Retirement plans FAQs on designated Roth accounts.

• Example B (Traditional 401(k)): A 65‑year‑old retires and begins distributions from a traditional 401(k). Distributions are ordinary income; RMDs must begin by the applicable required beginning date under § 401(a)(9) 26 U.S.C. § 401(a); see general RMD guidance Retirement topics—RMDs.

• Example C (Taxable Account): A taxpayer sells stock at a gain; the gain is reported on Form 8949/Schedule D; wash sale rules apply if repurchased within the window; interest/dividend income reported per Publication 550 Form 8949; Publication 550; Topic No. 403.

Key Takeaways

• Roth 401(k) contributions are taxable now but may produce tax‑free retirement income if distribution rules are met (5‑year clock and age 59½/qualifying event) Retirement plans FAQs on designated Roth accounts.

• Traditional 401(k) deferrals reduce current taxable income but create taxable retirement distributions and are subject to RMDs 401(k) plans; 26 U.S.C. § 401(a).

• Taxable accounts provide flexibility and no RMDs but incur ongoing taxes on interest, dividends, and realized gains; loss and basis rules (including wash sales) must be managed Publication 550; Topic No. 403.

Selecting the appropriate mix depends on your current and expected future tax rates, cash compensation, plan design, and the importance of flexibility versus tax deferral or tax‑free growth. For closely held business owners, coordinate salary, employer contributions, and plan compliance while optimizing asset location across Roth, pre‑tax, and taxable accounts under the governing IRS rules and guidance cited above Operating a 401(k) plan; 401(k) plan overview.