The Roth 401(k) is Getting More Popular

March 2, 2006

Jeff Opdyke of the Wall Street Journal wrote an article titled Roth 401(k) Picks up Steam, which details the fact that the Roth 401(k) is now being offered by GM.

Deciding whether or not to use the Roth 410(k) will most likely be a more difficult decision for people than choosing their asset allocation. The article does a good job of explaining how the Roth 401(k). It is a great choice for younger lower-wage earners because chances are good that they will be in a higher tax bracket when they retire.

The Roth 401(k) can also be a great choice for highly-paid executives because they are normally not allowed to use the Roth IRA because of income limitations. By using the Roth 401(k), highly-paid employees will be able to manage their taxes during retirement since withdrawals from the Roth will be tax free.

One potential negative I can see with the Roth 401(k) is the Alternative Minimum Tax. Since contributions to a regular 401(k) reduce income, they could conceivably keep a person from having to pay AMT. That’s something worth considering.

If my wife’s company ends up offering the Roth 401(k) I’ll have to look into more. As of right now, it looks like an interesting alternative.

3 responses to The Roth 401(k) is Getting More Popular

  1. I am suprised that my company (IBM) is not offering the Roth 401(k) this year. They are usually very good about picking up new options to help us with retirement (though many people were mad about the whole dropping of the pension, I view it as a good step for most). Hopefully next year we will have the option.

  2. If I have to pay AMT anyway why can’t I increase my tax liability by funding a roth 401K instead of the traditional IRA. I can create tax liability that “has some use” instead of just the AMT. Is my logic correct here?

  3. Hm…the article link is dead now.

    My firm is going to start to offer Roth 401k starting next year. A friend of mine at MSFT says it’s already started for them. So it looks like it’ll become more mainstream as time passes. It’s a great alternative in the retirement toolbox.