Few Companies to Offer Roth 401(k) in
2006
Starting in 2006, employers can offer employees the ability to make Roth
IRA-style contributions to their 401(k) plans — after-tax contributions that
lower take-home pay but grow tax-free for tomorrow.
Introduced as part of the Economic Growth and Tax Relief Reconciliation Act
of 2001, companies can begin offering the Roth 401(k) on Jan. 1, 2006. So
far, few plan to do so.
Only 35 percent of those polled by Hewitt Associates said they were likely to
offer the plan in 2006. Another study found even lower numbers – just 6% of
U.S. employers. Meanwhile, an informal survey of large employers in New
York found none planning to offer the Roth 401(k) in 2006.
However, experts expect the pressure to build quickly from employees
because of some of the same features that made the traditional Roth so
popular, including its flexibility and benefits for both lower- and
higher-income
workers.
“The more employers are confident that people will use the Roth 40l(k) the
more likely it is that they’ll offer them,” said Lori Lucas, director of participant
research at Hewitt Associates.
Tax-deductible contributions reduce taxable income the year they’re made, with
withdrawals of contributions and earnings taxed as income. Earnings on after-tax
contributions, on the other hand, are tax-free at retirement and aren’t subject
to minimum distribution rules.
While there’s no upfront tax-deduction, the account grows tax-free, and withdrawals taken
during retirement aren’t subject to income tax as long as you're at least 59 1/2 and have held the
account for five years or more. Employers who choose to offer the new Roth 40l(k) will allow
employees to split contributions between traditional pre-tax 40l(k) plans and the new Roth 40l(k) after-tax plan.
Yearly contribution limits for the Roth 40l(k) are much higher than for IRAs, so more workers can save more money. Unlike Roth IRAs, which are limited to people earning less than $110,000 annually ($160,000 for married couples), Roth 401(k)s have no such limit.
Martin Nissenbaum, national director of personal income tax planning at Ernst & Young, attributes the slow adoption of the Roth 401(k) to the corporate payroll and retirement plan system changes required to offer the new plan. The challenge of education — particularly helping employees understand the
impact of after- vs. before-tax contributions on retirement and current pay — also looms large.
Related Links:
Source: SmartMoney
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Few
Companies to Offer Roth 401(k) in 2006