Roth 401(k) accounts will - with the blessing of the Internal Revenue Service - make their debut effective Jan. 1, 2006.Unlike the 401(k), which is funded with pretax dollars, the Roth 401(k) is funded with after-tax dollars from the employee. Any employer match would remain taxable.

As with Roth IRAs, the gains are tax-free, whereas the gains in a traditional 401(k) are taxed as ordinary income. To qualify for a tax-free withdrawal, the participant must be age 59-1/2, and the Roth account must have been opened at least five years before distribution.

The opportunity to contribute to, or even open, a Roth IRA will end after 2010.

The primary appeal of the Roth 401(k) is to business owners and those higher-salaried employees who typically made too much to qualify for a tax-free Roth IRA.

The effect is that a tax-free option is newly available to large numbers of people. For well-to-do participants who already are maximizing their plan contributions, the Roth approach can allow a substantial increase in the contribution limit. It also allows them to maximize their estate assets, because Roth funds can subsequently be rolled into a Roth IRA, which doesn't require distribution during one's lifetime, and can create or preserve an income-tax-free legacy for heirs - thereby creating a good estate-planning concept.

But the availability of the Roth 401(k) is not something that is currently getting a lot of play within the advisor and planner communities. I have to believe you'll see a lot more activity about this subject during the fourth quarter.

But presently, for reasons unknown, Roth 401(k)s, like VEBAs, Double Ks, and 412(i)s, are plans that most people are not aware of, but that will be utilized by sophisticated advisors and clients to reduce taxes.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about VEBAs, retirement plans and tax-reduction strategies.

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