Roth 401(k) arrives in 2006

If you are already participating in a 401(k), and have wanted to contribute to a Roth individual retirement account, but couldn’t because of income limitations, the Roth 401(k) may be of interest to you. Many investors cannot contribute to a Roth IRA because of the adjusted gross income limits on this type of plan, meaning that if your adjusted gross income is too high, you do not qualify for a Roth IRA.

While the new Roth 401(k) is set to become available this year, the Internal Revenue Service is still finalizing the details.

The Roth 401(k) is a cross between a 401(k) plan and a Roth IRA.

As with a 401(k), contributions will be taken out of your paycheck and deposited into your selected investment alternatives.

And, as with a Roth IRA, you’ll contribute after-tax dollars to the plan, which means you will pay taxes on the contributions.

Your withdrawals in retirement will be tax-free if taken after age 59K and after at least five years from the date of the first contribution.

However, unlike a Roth IRA, there will be required mandatory withdrawals beginning at age 70K, such as you would incur with a 401(k) or a traditional IRA.

It’s important to note that if employers wish to offer the Roth 401(k) plan to employees, the employers must amend their existing retirement plans. While the government is still ironing out the details, many employers seem to be taking a wait-and-see approach to the Roth 401(k), which means that your employer may not offer it immediately, but you should be aware of what may come.

If your employer opts to offer a Roth 401(k), you’ll be able to contribute up to $15,000 in 2006, plus a $5,000 catch-up contribution if you are 50 or older.

Keep in mind that this contribution limit applies to Roth 401(k)s and traditional salary deferral 401(k) contributions in any combination.

So you won’t be able to contribute $15,000 to each of these plans – the limit applies to your combined contributions to both plans.

In addition, if your employer elects to offer the Roth 401(k) feature, you’ll need to assess the benefits of this feature to your particular situation. You may find that making after-tax contributions and potentially tax-free withdrawals works for your situation.

However, there may be some investors who find it to be beneficial to take advantage of reducing their taxable income now, even though future withdrawals will be taxed, but perhaps at a lower rate.

This is a consideration that you should discuss carefully with your financial consultant and tax adviser.

As previously mentioned, final rules have not been issued yet for this investment vehicle; therefore, the rules could change. You should be aware of this new plan and get acquainted with the general rules as they currently stand.

Your financial consultant can help you understand any further developments as final regulations are released.

As with any retirement plan, the most important thing is to start early and contribute consistently in order to take advantage of compounding.

It is never too early to begin funding your nest egg.

Timothy M. Reese is senior vice president-investments, with A.G. Edwards & Sons Inc. Member SIPC. He can be reached at timothy.reese@agedwards.com.[[In-content Ad]]