Please note the information below is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of the information provided below should not be acted upon without specific professional guidance. Please call us if you have any questions.

Is Roth right?

Right for your company and your employees, that is. Tax law changes give your company an opportunity to increase employee participation in its 401(k) plan and your employees another opportunity to invest in their futures … but many companies haven't even looked at the Roth option.

Traditional 401(k) plans can add a "Roth" feature for employee contributions with tax effects very much like those of a Roth IRA. This feature allows a 401(k) plan to permit an employee who makes elective plan contributions to designate some or all of those contributions as Roth contributions.

Unlike a traditional 401(k), which allows participants to invest pre-tax dollars but pay taxes at withdrawal, a Roth 401(k) holds after-tax dollars and requires no tax payment at withdrawal.

The Roth contribution feature operates similarly to the way in which employees currently make contributions to the company's 401(k) plan. The primary difference is employees participating in a Roth 401(k) must irrevocably designate a portion of their plan contribution as a Roth contribution and the company must treat this portion of the contribution as wages included in income and subject to applicable withholding requirements. The separate accounting requirement applies beginning when designated Roth contributions are invested in the plan and continues until the employee's designated Roth contribution account is completely distributed.

Each individual employee's situation—their investments, their post-retirement income, and the state of future tax laws—varies and will determine if a traditional 401(k) or a Roth 401(k) would ultimately benefit them more. Giving them the opportunity to invest in both plans helps them maximize their investments.

I can help you evaluate your current 401(k) plan to see if a Roth 401(k) option would be good for your company. I welcome the opportunity to meet with you to discuss your company's situation and this possible amendment to your current plan.