Roth 401K coming in 2006

Early indications suggest that plan sponsors are indeed interested in adding a Roth 401(k) option to their traditional 401(k) plan.

"From a selling standpoint, this is what is new and fresh coming up next year," Mr. Graff said. "Ultimately, the decision makers and plan sponsors are going to really want this, so you've got to be prepared to sell it."

Unlike a traditional 401(k), which is funded with pretax dollars, the Roth 401(k) will be funded with after-tax dollars from the employee only. Like a Roth individual retirement account, the gains are tax free, whereas the gains in a traditional 401(k) are taxed as ordinary income.

As evidence of the anticipated demand, Marcy Supovitz, principal with Boulay Donnelly & Supovitz Consulting Group Inc. of Worcester, Mass., cited during the presentation a survey of large employers last year by Hewitt Associates LLC of Lincolnshire, Ill. More than one in three employers, or 35%, said they may add a Roth 401(k) account to their defined contribution plan next year, the survey found.

Ms. Supovitz was "very surprised" that the percentage was so high, considering that at the end of last year, many employers probably hadn't fully explored the option.

Because the Internal Revenue Service this month released the proposed rules governing the Roth 401(k), Ms. Supovitz - who joined Mr. Graff on the panel - said she thinks "we are going to see that percentage increase quite a bit."

The Roth 401(k), she noted in her talk, benefits especially higher-income earners who may exceed the income limits to invest in a Roth IRA. In particular, Ms. Supovitz thinks the Roth 401(k) will be popular for sole proprietors with an individual 401(k) plan, otherwise known as the solo 401(k).

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