WORKERS disappointed that they can't contribute to a Roth IRA because their income is too high might be able to invest in a similar tax-friendly account next year through their employers.
That's when employers can begin offering a Roth 401(k), a new type of retirement account that incorporates features from the traditional 401(k) and the Roth individual retirement account.
Last week, the Treasury Department released proposed rules on the Roth 401(k), which was created under the 2001 tax law. The release kicks off the discussion about how the new retirement account will take shape as employers get ready to offer it Jan. 1.
Pension experts say there are many unanswered questions about the accounts, and they expect the Treasury to continue tweaking the rules in the months ahead.
One major question is what would happen to the Roth 401(k) after 2010, when the 2001 tax law is set to expire. It's also unclear whether workers, who are often overwhelmed by retirement choices, will take advantage of the Roth 401(k) or ignore it.
"It introduces another level of complexity, which in itself discourages people from saving," said Martha Priddy Patterson, a pension expert with Deloitte Consulting in Washington.
This new account also will be available for 403(b) plans, which are used by schools and nonprofits. It won't be part of 457 plans for state and local government workers.
What can you expect if your employer adds a Roth 401(k)? You likely will have the choice of contributing to the new account, sticking with the traditional 401(k) or dividing your dollars between the two.
Here's how the Roth 401(k) would work:
As in a Roth IRA, a worker's money goes into the account after taxes have been paid on it and the investments grow tax-deferred. Workers are able to withdraw the money tax-free as long as they hold the account for at least five years and are age 59 1/2 or older, pension experts said.
In contrast, workers make contributions to a regular 401(k) on a pretax basis, which reduces their income tax upfront. That money, too, grows tax-deferred, but investors pay ordinary income tax on withdrawals in retirement.
Employers can match workers' contributions to the Roth 401(k), as with the 401(k), but the match would be made on a pretax basis and kept in a separate account. Once workers withdraw the employer's match, they will owe income tax on it.
