As the debate on privatizing Social Security rages on in Washington, workers saving for retirement through their companies' 401(k) plans may have a new tool at their disposal: Roth 401(k) accounts, which companies are likely to roll out next year.
A Roth 401(k) works just like a Roth individual retirement account (IRA). Workers can put in after-tax amounts in the plan and withdraw contributions and earnings on those contributions tax-free at retirement. Regular IRAs, on the other hand, allow workers to deduct yearly contributions from their taxable income but require taxes to be paid when withdrawals begin.
There is, however, a twist to the Roth 401(k)s. Employees will place an after-tax amount in contributions to the Roth 401(k). But the employer match for the contribution--up to 3% of income at most companies--will go into a separate regular 401(k) account. This would enable the company to deduct its cumulative match contributions up front from its corporate income taxes.
Essentially, employees would get the benefit of not having to pay taxes on withdrawals from their contributions from the Roth 401(k). But they will have to pay income taxes on withdrawals from the company's contributions, including the earnings that have built up over the years.