Roth 401(k) offers another investing choice

Just when you thought you had a handle on saving for retirement, another investment option is coming along.

But it's no reason to be afraid. Choice is always good when it comes to investing. And this new choice could be especially good for some savers.

The new product, which becomes available Jan. 1, 2006, is called the Roth 401(k), and it's starting to gain interest in Utah and nationwide.

As you've probably guessed, the Roth 401(k) is similar to a Roth IRA (individual retirement account), according to Shane Stewart, a certified financial planner and chartered financial consultant with Deseret Mutual in Salt Lake City.

Deseret Mutual is offering the Roth 401(k) next year, and information provided to its clients says the product combines the best of a before-tax 401(k) plan and an after-tax Roth IRA.

With a traditional 401(k), employee contributions, employer matching money and earnings are not taxed when they are put into an account, but they are taxed when the money is withdrawn.

Shane says he encourages clients to think of the Roth 401(k) a little differently, with the employee's contributions serving as the "Roth" portion and the employer match operating as the "401(k)" portion. In other words, with a Roth 401(k), employee contributions are taxed up front, but those contributions and their earnings can be withdrawn tax-free later, based on certain conditions. Employer matching funds and earnings from them will still be taxed upon withdrawal, as they are in a regular 401(k).

So who should consider switching to a Roth 401(k)? Shane says some people could benefit, while others would not.

"The thing people need to decide in the here and now is, 'Do I pay the taxes on this now or potentially later?' " Shane says. "One thing they have to take into account is how this is going to affect their paycheck now. If I'm contributing to a before-tax 401(k) and switch to a Roth, I'll be contributing and paying taxes (now), and it will take more out of my paycheck. If that's going to adversely affect them or make them drop their contribution down, it's probably not worth it."

Another factor to consider is how much time investors have to let their money grow.

"If I'm about to retire, it's probably not a good idea to use the Roth, . . . because I don't have a lot of time to get that to grow potentially tax-free," Shane says. "The younger investor or earlier career investor has a bigger advantage, because they have lots of time to let it grow."