Roth 401(k)

In a posting in August 2005, we reported about forthcoming changes in 401(k) accounts. Today we update the information about a new kind of retirement account introduced in 2006: Roth designated 401(k) account.

Starting January 1, 2006, employers can offer this option to their employees but are not required to do so. A Roth-designated 401(k) allows employees to elect to treat all or part of their contributions either as tax-exempt contributions (as it was until 2005 end) or post-tax 'Roth' contributions.

The Roth contributions are included in the employee's taxable income when contributed, but the earnings grow tax-free. This option may be attractive to individuals who exceed the Roth IRA limit of $4000 a year. Distributions from Roth 401(k) accounts will be tax-free if withdrawals occur after the age of 591/2, death, or disability, and the contributions have been in the account for at least 5 years. The Roth portion of your 401(k) plan can only be rolled into another Roth 401(k) or a Roth IRA.