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Twice as Nice

The benefits of a Roth 401(k)

Exchange-traded funds win raves as great low-fee alternatives to mutual funds. Introduced in January 2006, the new Roth 401(k) gets similar kudos for enabling Americans to put after-tax funds into retirement plans for tax-free withdrawal after age 59 and a half. So some brokerages are beginning to couple the two for a new retirement plan concept: the ETF-based Roth 401(k).

One new ETF-based Roth 401(k) from ShareBuilder Corp. is primairly aimed at small businesses with 25 or fewer employees as well as self-employed workers. "The program is expected to be most attractive to higher-income small-business owners and younger workers with at least 10 years until retirement," explains Stephan C. Roche, vice president and general manager of the Small Business Group for Sharebuilder in Bellevue, Washington.

Roth 401(k)s allow the same maximum contribution per year as a traditional 401(k) ($15,000, plus $5,000 for those over 50). But for workers in a 35 percent tax bracket, putting $15,000 in after-tax dollars away is the equivalent of saving $23,057 pretax dollars. And for younger workers, more years until retirement means they are more likely to graduate to higher tax rates--the Roth 401(k) taxes at their current rate.

Setup and administrative fees somewhat offset the cost advantage. ShareBuilder, for example, charges a setup fee of between $195 and $995, a monthly participant fee ranging from $15 to $200 depending on the number of participants, and an account fee of 0.75 percent of assets under management. Still, the advantages may be well worth the price.

Jennifer Pellet is a freelance writer specializing in business and finance.

This story appears in the January 2007 issue of Entrepreneur. Subscribe »