Fans of the Roth IRA may want to think about acting on a provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 that lets employers offer employees a similar retirement-savings vehicle within their 401(k) plans beginning in 2006.
As with a Roth IRA, a Roth 401(k) enables taxpayers to contribute after-tax retirement savings that then grow and are disbursed, tax-free, in retirement. Open to taxpayers at all income levels, Roth 401(k)s can be a powerful retirement tool for business owners and employee participants, who are able to direct up to $15,000 into any combination of a regular 401(k) and the Roth 401(k).
But they're not appropriate for everyone, cautions Lawrence Macklin, wealth strategist with The Private Bank of Bank of America. "Participants who are in low tax brackets currently, but who expect to be taxed at a higher rate in retirement, would likely be better off in the Roth 401(k). But high-income individuals paying the highest tax rates might be better off with the regular 401(k) to benefit from a current tax deduction at the high rates."
Two further caveats may also hamper adoption. First, as funds cannot be mingled, managing Roth and traditional 401(k) accounts will add to an employer's administrative responsibilities. Also, since Roth 401(k) plans--along with other provisions called for in the EGTRRA--currently expire at the end of 2010, employers incur those costs with only four years of availability assured.
Jennifer Pellet is a New York City freelance writer specializing in business and finance.
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On average, a worker with below-average looks earns
Statistic Source: Federal Reserve Bank of St. Louis