New Roth 401(k) requires some tax planning - August 30, 2005

[roth401k]

New Roth 401(k) requires some tax planning

Aug. 30, 2005

The plan allows after-tax contributions and tax-free withdrawals, which may benefit higher-paid workers.

By Kaja Whitehouse

DOW JONES NEWS SERVICE

NEW YORK - Starting next year, investors may have access to a new 401(k) option aimed at reducing their retirement tax burden.

Deciding whether to contribute to the new option - known as a Roth 401(k) - may require some crystal-ball-gazing, however. Highly paid workers are the most likely to take the gamble and contribute to this new type of account. They are also the most likely to see it pay off, tax experts said.

The Roth 401(k) combines elements of the traditional 401(k) with the tax benefits of the Roth IRA. It allows people to contribute to tax-deferred savings accounts with after-tax dollars in exchange for the benefit of withdrawing that money tax-free in retirement. The traditional 401(k) is funded with pre-tax dollars, and withdrawals are taxed as income.

Workers with access to both a Roth and a traditional 401(k) will be limited to the same contribution cap as people with just one 401(k): $15,000 for 2006, or $20,000 for.......


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