Roth 401(k) on the Horizon: Worth the Effort

Abstract

401(k) and 403(b) plans can be amended in 2006 to add a Roth feature giving plan participants the advantage of paying no income tax on the earnings in their Roth account established within the plan. Successfully adding the Roth feature is a joint effort of the plan sponsor and the plan recordkeeper. The plan sponsor and the plan recordkeeper must work together to effectively communicate the complex tax choices to the plan participants. The employer payroll system must accommodate the required separation of this post tax Roth option from the pre-tax salary deferral, and the plan recordkeeping system must provide the appropriate account separation and reporting required under the income tax rules. Even though these tasks will require significant effort, the rewards for plan participants who are shut out of the Roth IRA option because of their family income level or who believe that they will be in a higher tax bracket when they receive payment from their account than when the contributions are made, will appreciate the effort.