NO ONE SAVES LESS THAN THEY USED TO:

Man's new best friend could be Roth 401(k) (TERRY SAVAGE, 6/12/05, Chicago SUN-TIMES)

[W]hat do you get when you cross a Roth IRA with a 40l(k) plan? You get a Roth 40l(k) -- and it's no dog of an investment. It's a new opportunity that will face employees in January 2006.

Companies will be offering employees a choice: You can continue making a pre-tax contribution to your company 40l(k) retirement plan. That means you'll pay taxes on all the money you withdraw at retirement, with the amount of tax depending on your tax bracket at that time.

Or, your employer may offer you the chance to make an after-tax Roth contribution to your company retirement plan. In effect, you're contributing to a Roth 40l(k). And since you've paid taxes on the contribution, that money and all the growth of your investments over the years, will come out completely tax-free.

Complicated but worth it

Yes, it's complicated. Since employees will be allowed to split their contributions between traditional pre-tax IRAs and new Roth 40l(k) after-tax plans, the record-keeping will be challenging. But major plan custodians, such as Vanguard, are already gearing up to provide the computer systems to enable this new dual system, according to Steve Utkus, director of the Vanguard Center for Retirement Research.

Says Utkus, "The real challenge will be for employees to decide which type of contribution to make."

We've all been taught the importance of pre-tax savings, growing tax deferred in the traditional 40l(k) plan. The idea is to pay the taxes later, after retirement, when you'll surely be in a lower tax bracket.

But that's not necessarily the case. In fact, many people -- lower-income as well as higher-income workers -- might be far better off paying the taxes right now, and making an after-tax contribution to this new type of Roth 40l(k) plan.

Why not exempt them from taxes all together?

Posted by Orrin Judd at June 13, 2005 10:17 AM