U.S. BUREAU OF LABOR STATISTICS COMPENSATION AND WORKING CONDITIONS

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Another Retirement Savings Option: Roth 401(k) Plan

by John E. Buckley

Bureau of Labor Statistics

Originally Posted: February 22, 2006

Employers now have a new retirement savings plan to offer their employees--the Roth 401(k) plan, which combines features

of Roth IRAs and traditional 401(k) plans.

Beginning January 1, 2006, employers have a new retirement savings option to offer employees. The plan, commonly

referred to as a "Roth 401(k)," is a hybrid that combines features of Roth IRA and traditional 401(k) plans but differs in

important aspects. Some of the differences and similarities are outlined in the exhibit. Employees who already have a regular 401(k) plan can participate in a Roth 401(k) if the employer offers it. However, the

combined total contributions cannot exceed the Internal Revenue Service limit set for individual plans--that is, $15,000 (or

$20,000 for employees aged 50 or over) in 2006. An employee who participates in both plans can designate the amount to

be applied to each plan. Once a decision is made, the participant cannot switch money among the plans. (Roth 401(k)

participants who change employers can roll over the proceeds into a Roth IRA.)

If an employer provides a matching contribution to a Roth 401(k), two accounts are set up for each participant. The first

contains the employee’s after-tax contributions that will be distributed tax free. The second account contains the employer’s

before-tax contributions and any investment growth; these funds are taxable when distributed.1

The National Compensation Survey (NCS) publication Employer Costs for Employee Compensation2 presents employer

costs data for various employee benefits. Currently, information is available for defined contribution retirement plans that

includes data for traditional 401(k) plans. When the NCS encounters the new Roth 401(k) plans, they will be included as

defined contribution plans in the NCS benefits incidence and provisions estimates.

Exhibit. Comparisons Of Roth 401(k), Roth IRA, And Traditional 401(k) Retirement Plans

Roth 401(k) plan Roth IRA Traditional 401(k) plan

Employee contributions are made with aftertax dollars.Same as Roth 401(k) plan. Employee contributions are made with 

before-tax dollars.

Investment growth accumulates without any

tax consequences.

Same as Roth 401(k) plan. Investment growth is not subject to Federal

and most State income taxes until funds are

withdrawn.

No income limitation to participate. Income limits: married couples,

$160,000, singles, $110,000

adjusted gross income.

Same as Roth 401(k) plan. No income

limitation to participate.

Contribution limited to $15,000 in 2006

($20,000 for employees 50 or over).

Contribution limited to $4,000 in

2006 ($5,000 for employees 50

or over).

Same as Roth 401(k) plan.

Withdrawals of contributions and investment

growth are not taxed provided recipient is at

least age 591⁄2 and the account is held for at

least five years.

Same as Roth 401(k) plan. Withdrawals of contributions and investment

growth are subject to Federal and most

State income taxes.
U.S. BUREAU OF LABOR STATISTICS COMPENSATION AND WORKING CONDITIONS

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Distributions must begin no later than age

701⁄2. (This may change.)

No requirement to start taking

distributions.

Same as Roth 401(k) plan.

John E. Buckley

Economist, Division of Compensation Data Analysis and Planning, Bureau of Labor Statistics.

Telephone: (202) 691-6299; E-mail: Buckley.John@bls.gov

Notes

1 More information on the latest regulations regarding Roth 401(k) plans can be found at the Internal Revenue Service (IRS) website at http://

www.irs.gov/pub/irs-regs/td_9237.pdf. 2 See Employer Costs for Employee Compensation, 1986-99, Bulletin 2526 (Bureau of Labor Statistics, March 2000).

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