Beat the Drums if You Want a Roth

Jan. 1 may seem a long way off, but employers and employees looking for ways to get the most out of their retirement benefits should start thinking about it.

That's the date on which "Roth 401(k)" plans become legal, allowing companies to begin offering workers the option of funding a 401(k) account with after-tax dollars, in addition to or instead of their traditional 401(k). Funding a Roth would mean higher taxes now, but no taxes, and no required withdrawals, later on in retirement on the money that's set aside that way.

So far, about a third of employers are planning to offer these accounts, or are at least leaning toward them, according to a survey by Hewitt Associates, a benefits consulting firm based in Lincolnshire, Ill. But experts also say that many have not yet focused on the decision.

"It's a little bit early on, and employers have not spent a lot of time thinking . . . through how appealing it may be to employees," said Lori Lucas of Hewitt. "It may go higher if there is a kind of a grass-roots [demand] from employees."

For employers, the new option entails some administrative headaches -- including such matters as keeping two separate 401(k) accounts for participating employees and getting payrolls adjusted to include and exclude the proper amounts on tax forms.

However, some experts think companies will find the accounts very appealing for at least certain types of workers.

Roth-type savings are named after the late senator William V. Roth Jr., a Delaware Republican who in 1997 pushed through the first individual retirement account of this sort, and they have long been controversial. In a traditional pretax k-plan, since the contributions have not been taxed, both the contributions and the earnings in the account are taxed upon withdrawal. But with a Roth, contributions are made from income that has already been taxed, so the withdrawals are not taxed, nor are the earnings from those contributions.

In theory, Roth IRAs could be used by the wealthy as estate-planning devices -- something proponents of the estate tax regard as unwise public policy. For that and other reasons, current law bars individuals with incomes over certain limits from contributing to a Roth IRA or from converting a traditional IRA to a Roth. Roth 401(k)s offer what one analyst called "an end-run around" those limits because anyone with any amount of current income will be able to sock away money in this way.

In 2006, 401(k) participants, either pretax or Roth, will be able to contribute as much as $15,000 -- or $20,000 if they are 50 or older and eligible for the $5,000 "catch-up" contribution that will be allowed.

Controversial Roth 401(k)s may be, but in an era of increasing life expectancies, vanishing traditional pensions and uncertainty about Social Security, allowing workers to stash away a chunk of their savings and let it grow, untaxed, into very old age may be quite desirable from a public policy point of view. It could create an incentive for retirees to hold off spending, possibly reducing their risk of running out of money.

Pretax 401(k) accounts and traditional IRAs both require minimum withdrawals, beginning when the account owner reaches age 70 1/2 (unless, in the case of a 401(k), he or she is still working), and while it is of course possible to save the money withdrawn and reinvest it in taxable accounts if the cash isn't needed for living expenses, some workers say they fear they will lack the discipline to do that. Roths do not require such withdrawals.

Further, with no taxes, what you see is what you get from a Roth 401(k). A $100,000 balance in a pretax account might provide only $70,000 or $80,000 in spendable cash after taxes are paid, whereas the whole $100,000 would be available from a Roth.