Gayle B. Ronan • E-mail

Refer to the Roth 401(k) in conversation and the likely response from even the savviest of retirement savers will either be a blank stare or a correction: “Oh, you mean a Roth IRA.”

But really, there is such a thing as a Roth 401(k). There is even a Roth 403(b)for those who work in education or for non-profit organizations.

“Among our [large corporate] clients, nearly 12 percent currently offer a Roth option,” says Pamela Hess, director of retirement research at Hewitt Associates, the Lincolnshire, Ill.-based provider of human resource consulting services. “But we expect to see that number double during 2008. ”

That is not bad for a retirement-savings option that has only been in existence since 2006, and one few workers have even heard of.

"Many of our early adapters are financial-service company clients. Their employees are pretty savvy and many were motivated to both have and use a Roth option," says Hess. Among the most motivated were the new hires. "Twenty-five percent of the new-hires are using the Roth 401(k) where it is available," she adds. This is more than double the participation rate for all employees.

It is also possible these new employees just tend to be younger employees. They, after all, are the demographic group most likely to benefit from participating in a Roth plan. 

The reason?

“With Roth accounts it is a matter of paying now rather than paying later,” explains Barry Picker, CPA and a certified financial planner with Picker, Weinberg and Auerbach CPAs in New York City. That is the opposite of what happens with traditional 401(k) plans.

With traditional plans, taxes are paid later, at retirement — contributions are made with pre-tax dollars, which means that portion of your income is not taxable. Assuming one’s tax bracket in retirement is lower than it was when the contributions were made, it results in a sweet tax-saving deal for its participants.

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Picker observes that most people like the idea of paying later. "They also like the [traditional 401(k)’s] instant gratification in the form of tax [liability]" he adds. "But the Roth actually can be a gift in the right situation." 

That situation involves someone who is in a lower tax bracket when they make their contribution than they will be when they start making withdrawals in retirement, explains Edward Dressel, president of Trust Builders, Inc. of Dallas, Ore., which provides retirement analysis software to advisers.  “Otherwise, there is no magic to the Roth,” he adds.

Roth 401(k)s are the inverse of traditional 401(k)s in that the taxman gets paid upfront. Contributions to these accounts are not deductible. But as long as withdrawals are made after the age of 59 ½, and provided the account was opened at least five years, no additional taxes are paid … ever, not even on future gains or reinvested income.

The Roth option, therefore, tends to offer the biggest bang for the after-tax buck to those employees who are just starting out. Their tax rates are likely to be much higher later in their careers.

The pay-now-reap-later aspect also attracts anyone, regardless of their age, who harbors a cynical suspicion that Congress will find a reason to raise individual tax rates just in time for all those baby boomer retirement dollars to begin their mandatory exit from all their tax-deferred retirement accounts.

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