BEAT the drums if you want a Roth

WASHINGTON -- Jan. 1 may seem a long way off, but employers and employees looking for ways to get the most out of their retirement benefits should start thinking about it.

That's the date on which "Roth 401(k)" plans become legal, allowing companies to begin offering workers the option of funding a 401(k) account with after-tax dollars, in addition to or instead of their traditional 401(k). Funding a Roth would mean higher taxes now, but no taxes, and no required withdrawals, later on in retirement on the money that's set aside that way.

So far, about a third of employers are planning to offer these accounts, or are at least leaning toward them, according to a survey by Hewitt Associates, a benefits consulting firm based in Lincolnshire, Ill. But experts also say that many have not yet focused on the decision.

"It's a little bit early on, and employers have not spent a lot of time thinking ... through how appealing it may be to employees," said Lori Lucas of Hewitt. "It may go higher if there is a kind of a grass-roots (demand) from employees."

For employers, the new option entails some administrative headaches -- including such matters as keeping two separate 401(k) accounts for participating employees and getting payrolls adjusted to include and exclude the proper amounts on tax forms.

However, some experts think companies will find the accounts very appealing for at least certain types of workers.

Roth-type savings are named after the late senator William V. Roth Jr., a Delaware Republican who in 1997 pushed through the first individual retirement account of this sort, and they have long been controversial. In a traditional pretax k-plan, since the contributions have not been taxed, both the contributions and the earnings in the account are taxed upon withdrawal. But with a Roth, contributions are made from income that has already been taxed, so the withdrawals are not taxed, nor are the earnings from those contributions.

In theory, Roth IRAs could be used by the wealthy as estate-planning devices -- something proponents of the estate tax regard as unwise public policy. For that and other reasons, current law bars individuals with incomes over certain limits from contributing to a Roth IRA or from converting a traditional IRA to a Roth. Roth 401(k)s offer what one analyst called "an end-run around" those limits because anyone with any amount of current income will be able to sock away money in this way.

In 2006, 401(k) participants, either pretax or Roth, will be able to contribute as much as $15,000 -- or $20,000 if they are 50 or older and eligible for the $5,000 "catch-up" contribution that will be allowed.

Controversial Roth 401(k)s may be, but in an era of increasing life expectancies, vanishing traditional pensions and uncertainty about Social Security, allowing workers to stash away a chunk of their savings and let it grow, untaxed, into very old age may be quite desirable from a public policy point of view. It could create an incentive for retirees to hold off spending, possibly reducing their risk of running out of money.

Pretax 401(k) accounts and traditional IRAs both require minimum withdrawals, beginning when the account owner reaches age 70 1/2 (unless, in the case of a 401(k), he or she is still working), and while it is of course possible to save the money withdrawn and reinvest it in taxable accounts if the cash isn't needed for living expenses, some workers say they fear they will lack the discipline to do that. Roths do not require such withdrawals.

Further, with no taxes, what you see is what you get from a Roth 401(k). A $100,000 balance in a pretax account might provide only $70,000 or $80,000 in spendable cash after taxes are paid, whereas the whole $100,000 would be available from a Roth.

But regardless of the policy issues, the advent of Roth 401(k)s will add yet another complex choice for many workers.

"I hope it doesn't result in lower 401(k) plan enrollments," said Michael Weddell, a retirement consultant in the suburban Detroit office of Watson Wyatt Worldwide. Weddell noted that research has shown that when an employer offers more than 30 or 40 investment choices in its 401(k) plan, employee participation rates go down "because there's kind of a paralysis by analysis" as workers are unable to decide where to put their money.

The Roth option is most likely to appeal to "more savvy investors" and "anyone who believes taxes are likely to be higher in the future," Hewitt's Lucas said.

In fact, she said, "we are hearing from individuals who are not sure (which way taxes will go) but want to diversify in the event taxes may be higher."

Along those lines, Weddell also said that tax-free withdrawals will not be allowed until five years after the first contribution, "so even if you like pretax better," you might put a little on the Roth side just to get the five-year clock started in case you later want to put more into the Roth account.

Most analysts figure that the economic value of the immediate savings from pretax deductions is the same as that of the future savings from the tax-exemption -- if tax rates remain the same.

So the choice is "a bet on whether your marginal tax rate will be higher or lower" in retirement, Weddell said.

The assumption underlying traditional IRAs and 401(k)s was that income usually goes down in retirement so your tax rate should, too. If that happens, a worker is better off taking the upfront tax benefit and paying later.

It's certainly true that tax rates overall have declined in recent years. A worker entering the labor force in the 1960s and retiring in, say, 2002, would have been well advised to take the upfront benefit.

But will that continue? The large federal budget deficits and growing public benefit programs, such as Medicare and Medicaid, need to be cut or paid for, with the latter choice suggesting a likely tax increase.

There are also twists and turns that need to be ironed out. The Internal Revenue Service issued proposed regulations this winter, but they are very broad and experts view them more as a starting point for discussions than the final word.

This means that workers who really want one of the new Roth accounts should start making their wishes known to their employers. The employers not only have to decide if they are willing to offer the accounts, they also have to make sure all recordkeepers, investment managers and others involved are up to speed.

Now is not too soon to start.

Albert R. Crenshaw writes for The Washington Post.