In Roth IRA Conversion Rules Highlighted Russ commented that his employer is starting a Roth 401k plan in 2008. The Roth 401k plans are relatively new and many people haven’t heard of them yet. Employers are slowly starting to offer them to employees. Let’s explore how the Roth 401k works, the benefits over the Roth IRA, and why it is taking time for employers to offer them!
What is a Roth 401k?
The Roth 401k is a great retirement savings vehicle with many of the same benefits as a Roth IRA including:
- Tax free growth.
- Ideal for investors currently in a low tax bracket, but anticipate being in a higher tax bracket in retirement. This is the case for many younger workers.
- Offers the ability to diversify accounts against tax treatment using a combination of regular 401k and Roth 401k. A great idea because of the uncertainty of taxes in the future.
In addition, for those who are interested but restricted from participating in a Roth IRA, the Roth 401k makes sense. Additional benefits over the IRA include:
- No income limits. Great for higher paid workers.
- Contribution levels are higher. See 2010 Roth 401k and Roth IRA Limits.
As always, there are other points to consider including the investment options and expenses of the investments when deciding whether or not to participate in a Roth 401k.
Why Employers are Slow to Implement
The Roth 401k didn’t have a lot of employers that immediately put it into place because the original legislation made it only a temporary plan existing from 2006-2010. That changed in 2006 when the Pension Protection Act was signed making the Roth 401k permanent. Employers may still be reluctant because they have to account for the following:
- Keeping the highly paid employees contributions in line with the others to keep the plan qualified.
- Additional education needed to help employees make the right choice between the traditional pre-tax option and the new after-tax option.
- And of course the plan sponsor would charge additional fees.
Other Roth 401k Tidbits
- Employer matching funds will still be deposited into the pre-tax 401k account.
- Further advantages for proprietors of owner-only businesses are detailed in an old article from Investment Advisor.
I will keep encouraging my employer to offer the Roth 401k. It will benefit a great deal of the workforce. Until I get the plan offered to me, I’ll continue to get excited for readers, like Russ, who get to take advantage of it. It would be great to hear from others that are getting the chance to participate. And don’t forget, if you have both, you can contibute to a Roth 401k and a Roth IRA at the same time.
My employer decided to offer a plan for 2008! Read about it, including some reader questions about the Roth 401k.