Can you benefit from Roth 401(k)

As 2005 ends, you are a year closer to retirement. Even though that day may still be a long time away, it will eventually arrive so you’ll need to prepare for it. And starting next week, you may have one more retirement savings vehicle the Roth 401(k).

Just like a regular 401(k), a Roth 401(k) allows you to spread your money among a variety of investments. But there are differences between the two types of 401(k) plans. When you invest in a traditional 401(k), you generally contribute “pre-tax” dollars, which means you are not taxed on your contributions today. These contributions and your earnings will be taxed when you withdraw them at retirement. Using the Roth feature in your 401(k) allows you to contribute “after-tax” dollars, which means you pay taxes on your contributions right away. However, your withdrawals and earnings will be tax-free (provided you’re at least 59 1/2 and you’ve had the account for at least five years when you retire).

Furthermore, if you leave your job, you can roll over the Roth portion of your 401(k) into a Roth IRA and Roth IRAs don’t force you to take required minimum distributions after you turn 70 1/2, which could be a big advantage if you won’t need the money until later in your retirement years.

And here’s one more advantage of the Roth 401(k): There are no income restrictions attached to it.

Of course, your employer may not even choose to offer the new Roth feature in your company’s 401(k). But if it is available, should you contribute? Before deciding, consider these factors:

* Your age The younger you are, the more advantageous it may be to contribute some of your 401(k) dollars into the Roth portion of your plan. As a young worker, you’ll have more years to take advantage of the tax-free earnings potential provided by the Roth feature. This additional time helps compensate for the cost of having to fund your plan with after-tax dollars.

* Your tax bracket at retirement If you expect to be in a high tax bracket when you retire, you may find the Roth 401(k) to be particularly appropriate. The value of being able to withdraw tax-free is worth more if you’re in a high tax bracket.

* Your willingness to divide 401(k) dollars between “pretax” and Roth Your total 401(k) contributions from all sources are limited to $15,000 in 2006 (or $20,000 if you’re 50 or older). You could choose to put all $15,000 into either the pre-tax portion of your 401(k) or the Roth (after-tax) portion. You could also divide the $15,000, in any ratio you choose, between the two portions. For example, you could defer $7,500 into the pre-tax portion and $7,500 into the Roth portion.

Before investing in the new Roth feature of your 401(k), you may want to consult with your tax advisor and investment professional. You might only have a few years in which to take advantage of the Roth 401(k), because it will cease to be offered in 2010, unless Congress acts before then to make it a permanent fixture of the retirement planning landscape.

As long as it’s around, though the Roth 401(k) is going to be a valuable retirement savings vehicle so think about putting it to work for you.

Submitted by Reece Nichols, an Edward Jones stockbroker with offices at 1100 Stone Rd., Suite 100.