Employers are starting to offer Roth 401(k)s

ON THE MONEY

Your Money

March 05, 2006|By GAIL MARKSJARVIS

Imagine having your lifetime's savings all to yourself, never having to share a penny with Uncle Sam.

If you work for some companies, that option is at hand.

Starting this year, firms have begun to offer their employees Roth 401(k)'s, a cross between the old 401(k) you've known for years, and the Roth IRA you might have used away from work.

With a Roth 401(k) retirement savings plan, you contribute money from every paycheck, just as you do with any 401(k) plan at work. But you don't get a tax break at that point. The major advantage comes at the end of your saving years: No matter how much money you accumulate in a Roth 401(k), it will be entirely yours with no tax strings attached when you retire.

That's no small matter. According to an AARP survey of retirees, almost half of seniors over 75 years old worry about paying their utilities, and 48 percent with homes are afraid they won't be able to afford the property taxes.

When people save money in a traditional 401(k), they don't have that security. They are required to pay taxes on their savings when they withdraw funds for retirement.

"A Roth 401(k) or a Roth IRA takes the uncertainty out of predicting the future," says Ed Slott, a certified public accountant and IRA expert in Rockville Center, N.Y..

He considers the choice between a Roth 401(k) and a typical 401(k) a no-brainer: "Always use the Roth because you can't beat a 0 percent tax rate."

Not all of Slott's peers agree. Some argue that if you are in a high tax bracket now, but will likely be in a lower tax bracket when you retire, it can be wise to use a traditional 401(k) instead of a Roth IRA.

With the traditional 401(k), you reduce your taxable income every time you make a contribution to the retirement plan. So, with lower income, you pay less in taxes at a time in your life when your taxes might be high.

The Roth 401(k) gives you no tax break up front. Instead, the bonanza comes at the end.

The only time he would suggest using a regular 401(k) over a Roth 401(k), he said, is if a person's income is so low he can't afford to save much for retirement unless he gets the tax break up front.

On the other hand, Brett Goldstein, a pension administrator in Plainview, N.Y., said people must be cautious about using Roth 401(k)'s if they might need to take money out of the plan within a few years and will be younger than 59.

Under the rules, he said, a person must leave the money in a Roth 401(k) for at least five years and be at least 59. If they aren't, they face tax penalties. And Goldstein said trying to move a Roth 401(k) to another job could be difficult. If the new employer doesn't have a Roth 401(k), the only option is to move it to a Roth IRA, he said.

Only about 6 percent of large employers are offering Roth 401(k) plans now, although 34 percent say they might add them before the end of the year, according to benefits consultant Hewitt Associates.

Goldstein said the rules for employers are complicated and involve expensive calculations and paperwork, especially when an employee match is involved. The match can't go into the Roth portion of the 401(k), he said.

Besides extra costs, employers are reluctant because the law only has a provision for Roth 401(k) plans until 2010. Then, if the law isn't changed, companies will have to redo the plans, Goldstein said.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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