The Upcoming 401(k) Dilemma - March 31, 2005

[roth401k]

March 30, 2005

THE UPCOMING 401(k) DILEMMA
By Allen Buckley

Beginning in 2006, with respect to 401(k) plans that so provide, participants will be allowed to elect to treat their 401(k) deferrals as Roth after-tax contributions. Thus, many individuals will need to decide whether to continue the traditional 401(k) route of tax deferral or pay taxes currently in exchange for complete exemption from taxation upon distribution at retirement.

In statutory form, 401(k) plans have been permitted since 1978. The popularity of these plans grew incredibly during the 1990s. Today, they are the prevalent tax-qualified deferred compensation plan.

Roth IRAs are a relatively recent phenomenon. Internal Revenue Code Section 408A was added in 1997 to specifically allow after-tax (Roth) IRA contributions that grow tax-free and then permit the owner to withdraw the contributions plus earnings free of all federal tax.

After-tax contributions to 401(k) plans have been permitted for years. Typically, these contributions have been called "thrift" contributions. While thrift contributions may be withdrawn tax-free, any earnings on thrift contributions are subject to income tax upon distribution. In contrast, a future Roth 401(k) distribution .......................

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Author Allen Buckley is a partner with the law firm of Smith Moore LLP in Atlanta, Georgia. His practice emphasizes employee benefits and tax matters. He can be reached at (404) 962-1042 or allen.buckley@smithmoorelaw.com.

About Smith Moore LLP:

Tracing its roots to 1919, Smith Moore LLP counsels clients throughout the Southeast, the nation, and abroad. Recognized for a personal commitment to solving complex legal issues, Smith Moore attorneys bring a passion for excellence, teamwork, and innovation to their representation of clients in the areas of Business, Litigation, Health Care, and Labor & Employment. More than 100 attorneys practice out of offices in Atlanta, Ga., and Greensboro, Raleigh, and Wilmington, N.C. For more information, visit www.smithmoorelaw.com.