Ted Benna

To do or not to do, that is the question employees and employers will face when the Roth 401(k) makes its debut Jan. 1.

The new retirement tool may not be for everyone, and experts are divided about its merits.

However, most agree it’s the young and the affluent who most likely will benefit from what is a combination of the traditional 401(k) and the Roth Individual Retirement Account .

A traditional 401(k) allows a worker to save retirement money tax free until the time of withdrawal. A Roth IRA, named for the late Republican Sen. William Roth who co-sponsored its legislation, is funded with after-tax money and is protected from future taxation.

The Roth 401(K), or Roth-k, allows workers to save after-tax money for retirement. And, since the money has already been taxed, it can be withdrawn at any time without penalty.

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“It’s basically a matter of do you want to pay taxes now or do you want to pay taxes later,” said Ted Benna, who is credited with creating the 401(k) program 24 years ago.

Benna said he hasn’t been too impressed with the new program, but admitted that it could benefit workers if they carefully consider their tax-bracket situation at the time of payment.

For instance, if a younger worker is beginning his or her career, in a relatively low tax bracket and expects to increase earnings later in life and move into a higher tax bracket, then it makes sense to pay the lower amount of taxes at the front end of the savings.

“But, you know, that’s only if they can afford to take the pinch in their income early in the game,” Benna said. “If they think they’re going to be a superstar in their career and make a ton of money, then it may be a good idea.”

Another group that may benefit from the Roth-k are the especially affluent, those who cannot contribute to a Roth IRA because of income limits. The Roth-k has no such restrictions.

Workers who are well compensated may find tax protection under the Roth-k plan.

For those who already have a traditional 401(k), the decision whether to fund a Roth-k becomes a little more complicated, Benna said.

Workers will not be allowed to double up on contributions by participating in both 401(k) plans. The allowed contribution for either – or for both combined – will still be $15,000 in 2006.

If workers choose both plans, they’ll have to decide which to draw from first when they retire, because, again, the decision hinges on tax bracket status, Benna said.

Benna believes only larger companies will offer the Roth-k plans initially. He said one of the hurdles for introducing the plan will be educating human resource professionals about record keeping for taxable and non-taxable savings.

Some of the record keeping is likely to cost employers more, so that could convince some to forego sponsoring the new plan, Benna said.

But, according to the international consulting firm Hewitt Associates, about a third of America’s employers are considering offering their workers the Roth-k option in 2006.

Even if one were to decide the Roth-k is right for them and their employer decides to offer it, Benna said there is one important thing to consider, whether Congress will eliminate the plan or change the rules.

The Roth-k was created under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. Part of the provision requires Congress to revisit the Roth-k plan in 2010 to consider whether to extend or sunset the legislation.

Benna said Congress saw the opportunity to maximize tax revenue before baby boomers leave the work force by offering taxation at the front end of a retirement plan.

So, whether the Roth-k plan will survive may depend on how much the federal government needs tax revenue.

Advocates of the plan acknowledge that it may very well end at the end of the decade but comfort investors by saying that their Roth-k tax protection status would be grandfathered and protected.

Benna said don’t count on it.

“The government changes things all the time,” he said. “You just don’t know what they’re going to do.”