�The Wallet Doctor�
A financial newsletter for long-term investors!
Volume 1, Issue 9
Dr. Scott Brown, Ph.D.
WHAT IS THE ROTH 401(K)?
This retirement account is so new and unique that you may not have heard of it. For additional reasons, I describe in my home study course, corporate insiders may not want to offer it to corporate employees. This is because some executives only consider their employees canon fodder.
The Roth 401(k) was created when the Economic Growth and Tax Relief Reconciliation Act of 2001 was passed. There is a provision in the law that allows employers to offer their employees the opportunity to make Roth 401(k) deferrals. Nobody paid much attention, since the new provisions applied only to tax years beginning after 2005, but now 2006 is almost here, and people are waking up.
Deductible IRAs and regular 401(k) plans work well for those taxpayers who expect their marginal tax rate to decrease during retirement because they will be making less money. This means that you're waiting until you retire to pay taxes on dollars you make today at a higher marginal tax rates. You pay on all that money during retirement when your marginal tax rate is less.
Some taxpayers who are smart investors actually expect their marginal tax rate to either remain the same or actually increase when they retire because they are a lot wealthier from their stock investments. They also want to spend and have fun since they taught their kids well how to fend for themselves. There are many investors out there that would certainly fall into this category, even if they don't know it quite yet from investing smart in the stock market as I teach in my home study course.
For those taxpayers who are going to be worth a boatload of money down the road, the Roth IRA used to be the absolute king. Like I told you in newsletter volume 1, issue 5, you pay taxes today when you aren�t worth as much but get to take it out and go on world cruises and the like after you retire (assuming certain restrictions are met). And that's just �neater than peanut butter� for those taxpayers who expect to get whacked by the IRS on taxes when they retire. But don�t forget that the nasty drawback to the Roth IRA for many people is the fact that contributions can't be made if income is above certain limitations.
For the Roth 401(k), this is longer the case. Beginning in 2006, a 401(k) plan may allow employees to designate some or all of their elective contributions as Roth contributions. Different from regular 401(k) contributions, which are excluded from the employee's taxable income, any amount designated as a Roth 401(k) contribution would be included as taxable income to the employee.
But when you take cash out of your Roth 401(k) contributions at retirement it is completely free from federal tax. Also, unlike regular contributions, Roth 401(k) contributions are allowable regardless of your income level. So, if you are pulling down the big bucks this allows you to have the glorious benefits of the Roth IRA account I told before that you couldn�t put money into because of your high income.
Your employer is going to kick up the administration fees but if you understand the great benefits you probably won�t mind. In order to make this Roth 401(k) thing happen, the company that administers your regular 401(k) plan will have to perform additional accounting. The Roth 401(k), and the associated earnings, will have to be maintained in a separate account from your regular 401(k) monies. Additionally, the administrator will be required to separately to separate out, on a reasonable and consistent basis, gains and losses between the designated Roth contribution account and other accounts under the plan. Because of this increased accounting requirement, I guarantee that they are going to pass on these increased fees to you to administer these types of plans.
One of the drawbacks to the Roth 401(k) plan is that no employer matching contributions or plan forfeitures can be allocated to the Roth contribution account. That means that you won�t get any matching and won�t be able to roll over dough from your regular 401(k). If you study my course carefully you will understand why you probably won�t care.
Here are some other notes relative to the new Roth 401(k) account:
� Section 403(b) Plans are eligible. While the new law specifically refers to 401(k) plans, 403(b) plans are also a go.
� Plans must be amended. Before accepting Roth contributions, 401(k) and 403(b) plans must be amended to allow for separate tracking of the Roth contributions. Again, this will be an additional expense to the employer that they will pass on to you.
� Plan changes are voluntary for the employer. There is nothing in the law that requires employers to change their 401(k) or 403(b) plans to allow for the Roth contribution. If this is the case with your employer, there is essentially nothing that you can do about it. It simply means that you will not be allowed the benefits of a Roth 401(k) with that employer. After you study my course you will understand why the executives up top may not want you to have a Roth 401(k).
� This is for a limited time only. Roth 401(k) plans are scheduled to expire at the end of 2010. Therefore, after 2010, Roth contributions could remain in the plan, but no new Roth contributions could be made after that time. Obviously, Congress could extend these provisions at some time in the future. This is likely should these plans become popular and the managing insiders let their corporations have the plan.
So it's not too soon to start hammering your corporate employer about this plan for 2006. You can see if your employer is interested in making the plan amendments. It's likely that the major corporations will be more interested in adding the Roth provision to their 401(k) plans than smaller corporations or businesses because of the cost but again it depends on where your employer�s executive inside interests are aligned. You'll want to check with your employers to find out where they stand on the Roth 401(k) and how likely it might be that they will make the appropriate adoptions necessary to implement the plan.
If you can pick this beauty up it is a phenomenal way to buy stocks low and sell them high tax free as I teach you in my course �The Blue-Collar Base Bonanza � What the insiders [definitely] don�t want you to know!� More course information is on my website at http://walletdoctor.com/cgi-bin/arp3/arp3-t.pl?l=3&c=208.
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