Roth 401(k)'s -- an FYI

[dh003i]

I was talking to my Fidelity representative about SEP IRAs, SIMPLE IRAs, and self-employed 401(k)s, and he mentioned that there would be a new kind of retirement plan coming into effect in 2006 that will be much to my (and others') benefit: the Roth 401(k).

I've done some searching on the internet, and have found some useful websites, most notably Roth401k.com, which is a sister site of LifeTimeSavingsAccount.com, which is a sister site of RothIRA.com. I'd suggest everyone check it out. It will be a very beneficial plan.

It appears that essentially what will happen is it will be possible for employees to contribute after-tax dollars to a Roth 401(k), which would grow tax-free (instead of tax-deferred, where you pay at the income-tax rate upon withdrawal in retirement). However, employer's won't have to allow their employees to contribute to a Roth 401(K), so talk to your employer's about it, and those you work with. The university I work for hasn't even implemented Health Savings Accounts yet.

Any thoughts, articles, or comments are appreciated.

[GBurns]

Why would there be a need for such a thing as an after tax 401(k)? You can contribute all you want to an investment vehicle of your choice with no need for PD, plan administration, investment choice restrictions etc etc. So ,Why the need for the "shell" or whatever?

The vast majority of employers have also not installed Health Savings Accounts. Some because they are waiting for the dust to settle, some are waiting for HSA QHDHP to be available in their area, some have decided that there is just no benefit. There are many reasons why these employers have not put in an HSA and there are reasons why many will never do so. Why do you think that your university or any employer needs to have an HSA?

[dh003i]

GBurns: the reasons for a Roth 401(K) over a traditional 401(K) are all of the same reasons for a Roth IRA over a Traditional IRA. Simple as that. It is essentially the same comparison. I never said that any employer has to implement HSA's. I simply have said (elsewhere) that HSA's are to the employees benefit and should be implemented.

[GBurns]

An employer usually implements employer sponsored plans that are in the interest of the employer. While an employer might forego its own interest in favor of something that is in the interest of its employees, that raises the question of whether an HSA would be of any benefit to the employees. For many employers an HSA might not be in the best interests of its employees when the overall picture is considered and even without assuming that it is of any benefit to the employer.

If it is determined after evaluation by the employer that an HSA is of no worthwhile benefit, Why should it be implemented?

[Tom Poje]

I would disagree that the item mentioned is a 'new retirement plan' coming for 2006

EGTRRA simply states

If an applicable retirement plan includes a qualified Roth contribution program....

In other words, begining in 2006 a retirement plan can ADD a Roth 401 k feature. so instead of going out and setting up your own Roth you simply now have it as part of the plan. That of course would require separate accounting, requires administrator to file returns indicating Roth contributions, etc. so extra work at that end.

advantage to the employee: individual Roth probably has an annual fee

in a plan, the $ are pooled so maybe no fee???? or does it get 'spread' across the board and therefore other participants pay part of it???that is unclear.

since $ are pooled, supposedly better rate of return since there is a larger investment involved so to speak.

[mbozek]

An advantage of a Roth 401k/403b is that all employees can elect AT contributions up to $15,000 which will generate tax free earnings which will be more than the 4k permitted under a Roth IRA in 06. In 2006 a married couple with 75k in income will be in the 15% fed tax bracket. The contributions and earnings will have to be accounted for separately with separate recordkeeping.

[dh003i]

GBurns,

I would've thought the benefits of a Roth 401(k) would be obvious, for essentially the same reasons that a Roth IRA is generally superior to a Traditional IRA.

If you look at the math of HSA's, they're going to be to the benefit of employees, because a large chunk of it won't go towards low-deductable health "insurance". Instead, a small portion will go towards a high-deductible health-insurance plan, and up to the deductible could be invested in an HSA. This is good for employees, as it gives them more choices, and more money to save for the future.

The unfortunate aspect of HSA's is that if your employer provides you with as Low-deductible insurance plan, you're stuck. You can't get an HSA if your employer provides a low-deductible insurance plan. This is extremely unfair to individuals who have no choice in the matter, thus can't get the savings benefits of HSAs.

Likewise with the Roth 401k. For the vast majority of people, taxes will be higher during retirement -- even if their income is lower -- due to raised taxes. Thus, the Roth 401k investment is the better deal. Even if one's taxes are lower in retirement, if money is put in a Roth 401k long enough, it could still be better.

These 2 additional plans would add 2 additional requirements for separate recordkeeping. The benefits to employers they offer is that they make them more competitive among prospective employees -- who weigh the advantages of these plans -- and reduce costs. HSAs will most likely greatly reduce the expenses employers have to pay to provide health-care for their employees.

[Blinky the 3-eyed Fish]

Even if one's taxes are lower in retirement, if money is put in a Roth 401k long enough, it could still be better.

No, a traditional 401(k) is better versus a Roth from purely a tax standpoint if taxes are lower than when the contribution was made.