Roths Worth Another Look

The Roth Opportunities

Roth IRAs allow workers (and nonworking spouses) to contribute $4,000 ($5,000 if 50 or older), but only if your modified adjusted gross income is under $95,000 on a single return or $150,000 on a joint return. (With income slightly above those limits, a partial contribution can be made.) That's the easiest way to get tax-free growth working for you. And beginning in 2010, conversions to Roth IRAs from regular 401(k)s won't have income limitations.

The Roth 401(k) option, which doesn't have an income ceiling, was offered for the first time in January. But because of uncertainties about the future of this tax promise (prior to the Pension Act's passage it was scheduled to expire in a few years) and costs associated with developing systems to track after-tax contributions, few companies offered it. Now, with permanence assured, it will be popping up on more corporate-benefit menus.

If your employer decides to offer the Roth 401(k) option, who should consider the opportunity?

Young, low-income workers: If you're just starting your career, you're probably in the lowest tax brackets. You expect to make more money in the future, which will move you into a higher tax bracket. So it makes sense to pay the tax now on your Roth 401(k) contribution at your current low rate, with tax-free withdrawals in future years.

Young families: There are so many good deals with tax credits for simply having children, or credits for the cost of child care. There's even the earned income tax credit that allow some families to earn $40,000 a year or more and effectively pay no tax. If you fit in this category, you'll be better off with after-tax contributions in your current low tax bracket, and tax-free withdrawals in your retirement years.

Very high-wage earners: If you're already contributing the maximum to your company 401(k) plan, you've probably built up quite a lot of tax-deferred retirement savings. Just for the sake of diversification, you'll probably want to make your future contributions in an after-tax Roth format if your company allows. After all, you don't know what tax brackets will be in effect when you retire, and you can now hedge your bets by making some contributions pretax and some after-tax.