New Retirement Plans
The Roth IRA has been with us since 1997. It gave us, for the first time, a choice between paying taxes on retirement-plan contributions at the beginning of the process or deferring them until the end. Starting this year, we get the same option for employer-sponsored 401(k) and 403(b) plans.
If your company offers the new option, you'll be able to waive immediate tax deductions for retirement contributions. In place of the immediate tax deductions (which you've given up), you'll get the right to tax-free growth and withdrawals later. Unless you're likely to be in a significantly lower tax bracket in retirement than you're in now, it's a good option to consider. But be aware that taking the Roth option will decrease your take-home pay in the short term, since your 401(k) contribution will no longer be pretax. Still, as long as you wait until you're at least 59 and a half years old and you've had the account five years or more before making withdrawals, you'll make it up later. (Since you've already paid taxes on your contribution dollars, you can take what you've contributed at any time with no tax or penalty. Just remember that removing anything limits your growth potential.)
Tax-free gains aren't the only advan-tage of a Roth IRA. Unlike traditional IRAs, there is no mandatory withdrawal age. That gives you more flexibility in retirement and can help with estate planning, since you aren't forced to draw down the assets as quickly.
The new option should be especially helpful for those with incomes too high to qualify for Roth IRAs. Single filers who make more than $110,000 and couples with a taxable income above $160,000 have been phased out of eligibility for Roth IRAs in recent years. But now, because it's in a 401(k) and not an IRA, they can get the same benefits at significantly higher incomes. They can contribute more, too. An IRA is limited to $4,000 a year for most people. A 401(k), on the other hand, caps out at $15,000 annually for most of us. The limits are slightly higher for savers over age 50.
The law allowing Roth 401(k)s expires in 2011, but it will most likely be extended by Congress. So the question now is whether your company should offer the plan.
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