As employers look for more ways to help their employees save for retirement, Charles Schwab has released new data showing an increase in the number of plan sponsors making the Roth 401k available to employees. As of December 31, 2007, 35 percent of Schwab-administered retirement plans were offering the Roth 401k, a significant increase from 26 percent at the end of 2006. This number is also well above the industry average of around 22 percent, according to a Profit Sharing/401k Council of America 2007 Roth 401k survey.

"It is no secret that most Americans have to be their own advocate when it comes to retirement savings, but employers are showing a real commitment to helping employees save strategically," said Dean Kohmann, Charles Schwab vice president of 401k plan services. "Tax season is the perfect time for people to take a look at the Roth 401k and decide if it makes sense for them."

Schwab's Roth 401k Calculator

To help people make a determination about whether or not a Roth 401k is right for them, Schwab provides a Roth 401k Calculator on its Web site.

The tool enables plan participants to enter basic information including their expected retirement date, salary, and current retirement plan contribution level, and the calculator will compare retirement income for both a traditional 401k and a Roth 401k.

Depending on a person's individual tax situation, the Roth 401k can offer a strategic tax planning opportunity, according to Schwab. In a traditional 401k, contributions are made on a pre-tax basis and taxes are paid when the person takes distributions from the plan. In a Roth 401k, contributions are made on an after-tax basis and distributions and investment earnings are tax-free assuming the first distribution is at least five years following the first contribution and a person is at least 59 1/2 years old.

Kohmann pointed out that a Roth 401k makes the most sense for people who expect to be in a higher tax bracket in the future or higher-paid employees who might be precluded from making Roth IRA contributions due to income limitations. A Roth 401k can also be rolled into a Roth IRA, which requires no minimum distribution at retirement, presenting certain estate planning opportunities.

Roth 401k Picking Up Steam with Employers

"We have seen a steady increase in interest in the Roth 401k across most types of employers, but we see the highest buy-in among professional services firms and their employees," said Kohmann. "This is because employees at these types of firms are generally more likely to work with personal financial advisors who advise them to use Roth 401k, they typically have higher salaries that disqualify them from contributing to a Roth IRA as part of their tax strategy, and their salaries give them greater leeway to save for retirement on an after-tax basis."