How Are Roth 401k Contributions Calculated?

A Roth 401(k) is an employer-sponsored retirement savings plan funded with post-tax contributions. This means the money you contribute does not reduce your current taxable income, allowing for tax-free qualified withdrawals in retirement. Calculating these contributions involves knowing the contribution limits, how deductions are processed from your paycheck, and the tax treatment of any funds your employer might add to your account.

Contribution Limits That Define the Calculation

The Internal Revenue Service (IRS) establishes the maximum amount an employee can contribute to their 401(k) each year. For 2025, the employee elective deferral limit is $23,500. This cap applies to the combined total of any traditional pre-tax and Roth 401(k) contributions you make, meaning you can split funds between the two but your total contributions cannot exceed this limit.

To help workers nearing retirement save more, the tax code allows for catch-up contributions for those age 50 and over. For 2025, this additional amount is $7,500. This raises the total potential employee contribution to $31,000 for those eligible. A newer provision starting in 2025 allows for an even higher catch-up amount of $11,250 for individuals aged 60 to 63, if their plan adopts this feature, bringing their total contribution potential to $34,750.

The Paycheck Calculation Process

The calculation of a Roth 401(k) contribution is directly integrated into the payroll process, but it occurs at a different stage than pre-tax contributions. When your employer calculates your paycheck, they begin with your gross pay. From this gross amount, all applicable taxes—federal, Social Security, Medicare, and any state or local taxes—are calculated and withheld. It is only after these taxes are taken out that your designated Roth 401(k) contribution is deducted from the remaining pay.

For example, an employee earning a $3,000 gross bi-weekly salary elects to contribute 6% to their Roth 401(k). First, taxes are calculated on the full $3,000. Assuming a 20% combined tax withholding ($600), the 6% Roth contribution of $180 ($3,000 x 0.06) is then calculated on the gross pay. This $180 is directed to the Roth 401(k), and the employee’s final take-home pay is $2,220.

If the same employee contributed 6% to a traditional 401(k), the $180 contribution would be deducted before taxes, reducing their taxable income to $2,820. The 20% tax withholding would then be calculated on this lower amount, resulting in a tax of $564. The lower tax withholding means the employee’s take-home pay would be $2,256, which is higher than with the Roth option.

Factoring in Employer Contributions

The tax treatment of employer contributions, such as matching funds or profit-sharing, also affects your 401(k). Traditionally, these contributions are made on a pre-tax basis. The funds are placed into a separate pre-tax account, and you will owe income taxes on the contributions and their earnings upon withdrawal.

Employers now have the option to offer matching or other contributions on a Roth (post-tax) basis. If your plan allows this option, these employer funds are deposited into your Roth 401(k). These contributions and their earnings can be withdrawn tax-free in retirement.

The IRS sets a limit for the total amount of contributions to a 401(k) in a single year from all sources. For 2025, this overall limit is $70,000. This figure includes your elective deferrals, any employer matching contributions, and other employer contributions like profit sharing.

Correcting Excess Contributions

An excess contribution occurs when the total amount of your elective deferrals in a year exceeds the annual IRS limit. This can happen due to calculation errors or if you change jobs and contribute to more than one 401(k) plan during the year. It is the employee’s responsibility to monitor their total contributions across all plans and to rectify any overage.

To fix this, you must notify your plan administrator of the excess amount. The plan is then required to issue a corrective distribution to you, which will include the excess contribution plus any investment earnings. To avoid a 6% excise tax penalty on the overage, this corrective distribution must be completed by the tax filing deadline for that year, typically April 15 of the following year. The distributed excess amount is taxable as income for the year it was contributed, and the associated earnings are taxable in the year they are distributed.