The U.S Department of the Treasury issued proposed regulations that would allow plan sponsors to offer a new type of 401(k) plan: the Roth 401(k) contributions to plan participants beginning January 1, 2006. Participants will then have the option to defer some or all of his or her elective 401(k) contributions to a Roth 401(k), traditional 401(k) or both. Employer matching contributions, by law, will continue to be deferred into the participant's traditional 401(k) accounts.

Contributions made to a Roth 401(k) plan will be made with after tax-dollars, so contributions will not lower the participant's taxable income. The tax benefit for the Roth 401(k) occurs not when the contributions are made, but when monies are withdrawn from the account. Whereas traditional 401(k) contributions grow on a tax-deferred basis and will be taxed at the participant's income tax rate at the time of the distribution, qualified Roth 401(k) distributions will be tax-free from federal income tax. Better yet, unlike Roth IRAs, contributions to a Roth 401(k) will not be limited by the participant's adjusted gross income!

Total contributions to a participant's 401(k) account for the calendar year 2006 can not exceed $15,000, regardless if they were Roth 401(k) deferrals, traditional 401(k) deferrals or both. For plan participants who will be age 50 or older in the plan year can contribute an additional $5,000 as “catch up” contributions.