Roth 401(k) accounts will – with the blessing of the Internal Revenue Service – make their debut effective Jan. 1, 2006. Unlike the 401(k), which is funded with pretax dollars, the Roth 401(k) is funded with after-tax dollars from the employee. Any employer match would remain taxable.
As with Roth IRAs, the gains are tax-free, whereas the gains in a traditional 401(k) are taxed as ordinary income. To qualify for a tax-free withdrawal, the participant must be age 59-1/2, and the Roth account must have been opened at least five years before distribution.
The opportunity to contribute to, or even open, a Roth IRA will end after 2010.
The primary appeal of the Roth 401(k) is to business owners and those higher-salaried employees who typically made too much to qualify for a tax-free Roth IRA.
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