Here's one financial fact there's no debating: Employers are shifting more responsibility for your retirement to you. That means it's your job to examine options for socking money away and figure out which one (or ones) is right for you. One new item on the menu this year bears particular attention.
It's called a Roth 401(k) and it is — like it sounds — a hybrid of a Roth IRA and a traditional 401(k). As with a Roth Individual Retirement Account, you contribute to a Roth 401(k) with after-tax dollars.
Once you hit retirement age (59-1/2) you can begin to withdraw the money tax-free. That's the opposite of inflows and outflows from a traditional 401(k). With a 401(k), you contribute pre-tax dollars, then pay income taxes on your earnings when you retire.
What this new Roth shares with a traditional 401(k) is its home base at your workplace. Contributions move directly out of your paycheck and into the savings plan, avoiding a pit stop in checking that all too often results in money slipping through your fingers. Matching dollars, for the record, will go into a pretax account that you must pay taxes on at retirement.
If it sounds like manna from heaven — the Roth IRA has often been referred to as one of Congress's ultimate gifts — it's not. It is not a one-size-fits-all solution. But with one-third of employers expected to add Roth 401(k)s to their benefits menus this year (adding a new option is expensive), according to benefits consulting firm Hewitt Associates, it makes sense to spend a little time figuring out if the Roth 401(k) is your best option.
To see whether a Roth 401(k) is right for you, think about your tax brackets. The big question is whether you expect to be in a higher or lower tax bracket upon retirement.
If you expect to be in a higher bracket, you want to pay the taxes now — so the Roth 401(k) makes sense.
If you expect to be in a lower bracket at retirement, you want to pay the taxes then, so a traditional 401(k) makes sense.
However, it is worth noting that even if you expect to face a lower tax rate in the future, you can't be certain. "What makes you think the lowest tax rate 20 or 30 years from now won't be 35 percent?" asks Brett Goldstein, a pension administrator in Plainview, N.Y., and president of the Pension Department. If you don't like not knowing, you're best off paying the taxes now, which again makes the Roth 401(k) a smart move.
Ask yourself whether you can afford it. This time of year, taxes are top of mind and the deduction you receive for socking money into a 401(k) is far from inconsequential. Run the numbers using Turbo Tax or a plain old calculator and see what it will do to your bottom line before you make a change, suggests Ed Slott, a CPA and IRA expert from Rockville Centre, N.Y.
This is one reason experts say the new plan is best suited for high-income workers (who are shut-out of Roth IRAs due to income limits of $110,000 for singles and $160,000 for couples). The Roth 401(k) has no limits. You can also sock away more money in a Roth 401(k) than a Roth IRA. Contribution limits are equal to those for traditional 401(k)s — $15,000 maximum or $20,000 for those 50 or older.
Focus on the estate-planning benefits. One of the biggest benefits of a Roth IRA is that you never have to pull the money out. You can pass it along to the next generation. Although you must start taking minimum distributions from a Roth 401(k) at age 70-1/2 if you leave the money in that account, you can always roll it into a Roth IRA and leave it there. This is easy to do.
Consider splitting the difference. If, in the end, you think the Roth 401(k) sounds attractive, but you're not ready to go all in, consider splitting your contributions. If you contribute the maximum, you can put $7,500 in each plan, $10,000 in each if you're 50 or older.
A final note: The accounts are here today, but may disappear by 2010, when the 2001 act that created the Roth 401(k) is set to expire. Unless Congress makes changes to extend the life of this plan, its future remains uncertain. That's a hassle, but it's not insurmountable. Again, you can simply roll it into a Roth IRA, says Goldstein.
Jean Chatzky is an editor-at-large at Money magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today" show and is also a columnist for Life magazine. She is the author of four books, including 2004's "Pay It Down! From Debt to Wealth on $10 a Day" (Portfolio). To find out more, visit her Web site, .