New Roth 401(k) struggles for acceptance

The Roth 401(k) is a new tax-savvy retirement plan being virtually ignored by employers these days.

Like any benefit, employers don't have to provide the Roth 401(k). Only about 18 percent of U.S. companies surveyed said they would offer it when it became legal Jan. 1, according to the Chicago-based Profit Sharing and 401(k) Council of America, an employers' group.

"I see this as a great opportunity for my clients," said financial planner Michael Dubis of Touchstone Financial in Madison, Wis. "But employers see this as another expense, not a benefit."

Unlike its older cousin, the Roth Individual Retirement Account (IRA), there are no income limits restricting who can contribute.

Annual IRA contributions are limited to $4,000 per person ($4,500 if older than 50), and only jointly-filing married couples earning less than $160,000 and singles below $110,000 in adjusted gross income were able to fully invest in them.

Like the standard 401(k), in 2006 you can contribute $15,000 per year and another $5,000 if older than 50 to the Roth's 401(k) version.

While your initial income-tax bill will be lower with a standard 401(k) — you get a dollar-for-dollar cut in federal taxes for contributions — the loss of the upfront tax write-off may be more than offset by the Roth's tax-free compounding and withdrawal in retirement.

The No. 1 benefit of either Roth is that you can pull money out tax-free starting at age 59 ½, provided you are in the plan at least five years.

Since every non-Roth retirement program taxes you at the full rate when you pull out money, the Roth can boost retirement income by more than 35 percent relative to other programs if you are in the top tax bracket.

Some things to consider:

• Will you be in a lower tax bracket during retirement? If so, the conventional 401(k) may be better.

• The amount you will save on taxes depends upon how much you save in your Roth, how long you leave your money in and future tax rates.

• You can mix and match by contributing to your old 401(k) up to the employer match — if you receive one — then invest the remainder in your Roth. You can invest in both 401(k)s as long as you don't exceed the annual limits.