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12/04/2005
Personal Finance Department: The Best Retirement Account Ever, by Dan Grossman

Enacted in 2001, the Roth 401(k) goes into effect on January 1st, 2006.

Under a Roth 401(k), an employee, including an owner-employee of a one-employee business, can contribute $15,000 per year ($20,000 if the employee is over 50) to a retirement account regardless of how high the employee's income, something not true all these years for Roth IRAs. The employer, (which can be your own single-employee company), can also make a matching contribution up to 25%.

While contributions are not pre-tax (i.e., not deductible from income), all gains and earnings in the Roth 401(k) account are tax free, and all distributions out of the account starting at age 59 1/2 are also tax free. So if you're reasonably successful over the years in self-directing your best investments in the Roth 401(k) account, the miracle of tax-free compounding could easily result in an account of a couple of million dollars all tax-free on payout.

The one fly in the ointment, somewhat surprisingly, is that I have not yet found a plan administrator ready to set up a simple and inexpensive Roth 401(k) plan. Perhaps a reader knows of one, or is himself or herself a plan administrator or works for a firm that does plan administration.

Vanguard and other companies I have spoken to say they do not know if there will be sufficient demand so they will not be offering Roth 401(k)s on Jan 1 (they are wrong -- the demand will be there), and those that are offering it are doing so as an option to a conventional 401(k). That is, employees in a conventional 401(k) will now have the option of making their particular contributions either pre-tax or Roth after-tax. This makes for very significant record-keeping and administration expense in a combined conventional and Roth 401(k). Exactly the opposite of what was intended in the Roth 401(k) law and regulations which speak of simpler and less-expensive administration than in a conventional 401(k).

So it's the best retirement plan ever for successful investors. But I ask readers' help in setting one up.

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