Flex Your 401(k): Roth Option

U.S. employers are starting to offer a new kind of retirement savings plan that allows workers to withdraw money tax-free.

The Roth 401(k) combines features of the traditional 401(k) with those of the Roth individual retirement account. As with the Roth IRA, contributions are made to Roth 401(k)s with after-tax dollars. While you won't get an upfront tax-deduction, the account will grow tax-free, and withdrawals taken during retirement will not be subject to income tax, provided you're at least 59 1/2 and you've held the account for five years or more.

But unlike Roth IRAs, which are subject to income limits, depending on your tax filing and marital status, employees can contribute to a Roth 401(k) regardless of how much they earn.

"The real advantage of the Roth 401(k) is it gets more money working for you, tax-deferred," says Christine Fahlund, a senior financial planner at T. Rowe Price. For example, she says, if you contribute $15,000 to a Roth 401(k), you do so on an after-tax basis, so all the returns on that money are yours to keep. But if you contribute $15,000 in pretax money to a traditional 401(k), not all of that money will be working for you; some will be working for the government, because it's taxed as income when you eventually withdraw it.

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