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 a Roth 401(k). Employers' matching contributions would go into a separate regular 401(k) account to enable the company to deduct its contributions from corporate income taxes, while the employee will have to pay income taxes on withdrawals from the company's contributions, including earnings.
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