New Roth 401(k) Adds to Workers' Investment Options

Whether it makes more sense to pay taxes now or at retirement is a question many workers will be pondering if their employers offer them a new Roth 401(k) investment option.

Starting next year, the Internal Revenue Service will allow employers to offer a Roth 401(k), which has been described as a cross between the Roth IRA and a traditional 401(k). More than a third of employers say they “are very or somewhat likely” to add the new option, the Dallas Morning News reported, citing a study by Hewitt Associates, an employee benefits consulting firm.

One of the hallmarks of the Roth 401(k) is that there are no income limits, as there are with a Roth IRA. To be eligible to make the full contribution to a Roth IRA, individuals must have an adjusted gross income of less than $95,000; or less than $150,000 for married couples filing jointly.

Some of the guidelines are still being worked out for the Roth 401(k), but as is true for the Roth IRA, the contributions are taxed up front, so no taxes need to be paid when the money is withdrawn if certain conditions are met. This is unlike a regular 401(k) in which taxes are deferred until the money is taken out.

"If you feel tax rates will be higher in the future, you may want to consider doing a Roth 401(k) to take the tax hit now," Richard O'Donnell, pensions editor at RIA in New York, told the newspaper. He added, though, "You've got to be able to afford to front-load the taxes.”

One employee benefits expert says he would rather pay the taxes now, so he will invest in a Roth 401(k).

"I am absolutely personally convinced that income tax rates are going to go through the ceiling over the next 10 to 20 years," said Dallas Salisbury, chief executive of the Employee Benefit Research Institute in Washington.

Like a regular 401(k), employers can match workers' contributions in a Roth 401(k), but the worker will have to pay taxes on the employer's contribution upon withdrawal since the employer's match would be made on a pretax basis.

Next year, the limit for contributing to 401(k) plans is $15,000, which includes both options. Anyone who wants to maximize their contribution to their 401(k) will have to divvy up their $15,000 limit between Roth and regular 401(k) plans.

You may like these other stories...

By Deanna C. White Millennials may be incredibly savvy when it comes to using technology to research nearly every decision they make, but when it comes to determining their financial habits, a new survey suggests they...
By Deanna C. White A survey by the American Institute of CPAs (AICPA) indicates that many American parents are still reluctant to engage their children in significant conversations about money, with only 13 percent of...
By Jason Bramwell The percentage of higher education leaders who  are "very concerned" about their ability to maintain current enrollment levels is on the rise, according to the second annual Higher...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.