By Martin Sinderman
Contributing Writer

Another tax-advantaged means of stashing away retirement savings is making its debut on the benefits menus of companies in the Charleston area and nationwide.

A new tax-qualified, employer-sponsored retirement plan, the Roth 401(k) gives employees another way to have money automatically deducted from their paychecks in order to fund retirement accounts.

With the traditional 401(k) accounts that are widely used today, employees make contributions on a pre-tax basis, deducting what they contribute from their taxable income for the year the contribution is made—but leaving both contributions and earnings fully taxable when they are withdrawn.

But Roth 401(k) accounts, like Roth IRAs, are fed by employees on an after-tax basis. By contributing dollars that have already been taxed, these employees get better treatment of their contributions and earnings when it comes time to withdraw funds from these accounts, according to Tommy Taylor, a partner in the McKnight Frampton and Co. accounting firm.

“The main thing about the Roth accounts is that there is no up-front tax deduction,” said Taylor. “But if Congress holds true to form, you won’t have to pay any taxes when you withdraw from them.”

Recently introduced at McKnight Frampton, the Roth 401(k) “has been received warmly, especially by the younger people,” who have a long time window to enjoy the tax-free growth it offers, according to Taylor.

Meanwhile, this retirement savings vehicle can also be attractive to workers on the higher-income end of the wealth spectrum, according to Sandy Sanders, president of American Pensions Inc., a Mount Pleasant-based provider of retirement plan administration and consulting services.

“There are no limits on income for participating in a Roth 401(k),” Sanders said. Roth IRAs, in contrast, are not available to married couples earning $160,000 or more annually or to singles earning $110,000.

If you are under 50, you can invest up to $15,000 in either or both Roth and traditional 401(k) accounts this year, compared with the Roth IRA cap of $4,000. A “catch-up provision,” meanwhile, allows those 50 and older to contribute up to $5,000 more.

Like traditional 401(k) plans and IRAs, Roth 401(k) accounts are subject to Internal Revenue Service minimum distribution/mandatory withdrawal requirements beginning at age 70 1/2.

Savvy retirees with Roth 401(k)s can get around this by using Roth IRAs, which have no required distribution schedule.

“A Roth 401(k) can help tremendously in estate planning,” said Sanders. “By rolling it into a Roth IRA when you leave your job, you can keep on getting that tax-free growth, along with the opportunity to pass those dollars on to future generations.”

Hedging bets

Studies have estimated that around 20% of companies nationwide are now offering Roth 401(k) plans to their employees, a figure that is likely close to the degree these accounts have penetrated the Charleston market, Sanders said.

“I haven’t seen a rush (to implement Roth 401(k)s) by any means,” Sanders said. “One of the biggest holdbacks is that the IRS has not completely finalized the regulations, which made some employers timid about it.”

Meanwhile, he noted, these accounts are projected to “sunset” in 2010, along with other provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 that created them, unless Congress votes to extend.

Even though they may have only a few years in which to do so, employees would be smart to take advantage of the Roth 401(k), Taylor said, especially those who may be in a higher tax bracket when they retire.

“You never can tell what Congress is going to do,” Taylor said, “but my opinion is that tax rates are going to go up, due to continuing deficits, the Iraq war and Katrina—so I would hedge my bets.”

Those already holding traditional 401(k) accounts “might be tempted to shift a little into a Roth 401(k), which will provide some options when you withdraw the money—some of it taxed, some tax-free,” he said.

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