The New Roth 401(k) Is Here - May 13, 2005

[roth401k]

The New Roth 401(k) Is Here

By Roy Lewis (TMF Taxes)
May 13, 2005


When the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed, there was a provision allowing employers to offer their employees the opportunity to make Roth 401(k) deferrals. This provision of the law received little fanfare, since the new provisions applied only in tax years beginning after 2005. Well, 2006 is almost here, and many people are beginning to take notice of this provision in the law -- including the IRS.

Deductible IRAs and regular 401(k) plans work well for those taxpayers who expect their marginal tax rate to decrease during retirement. This means that you're deferring dollars today at a higher marginal rate and then taking those distributions during retirement when your marginal tax rate is less. Therefore, you're gaining a percentage benefit on those future distributions, not to mention the tax deferral of the account while it is in place.

On the other hand, many taxpayers actually expect their marginal tax rate to either remain the same or actually increase during retirement. This isn't as odd as it seems at first blush. It could be that the tax rate increased because of legislative fiat. And........

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