Please note, this information is based on the proposed regulations. Some of this information may change when the final regulations are issued.

What is a Roth 401(k) and how is it different from a traditional 401(k) Plan?
Salary deferrals to a Roth 401(k) are made with after-tax dollars. In a regular 401(k) plan, salary deferrals are made on a pre-tax basis.

This means that when that the Roth 401(k) contributions are withdrawn (see below on when they can be withdrawn), no more taxes are paid — the contributions and their earnings are tax-free. Since regular 401(k) contributions are made on a pre-tax or taxdeferred basis, the contributions and their earnings are taxed as income when they are withdrawn.

How much can I put into a Roth 401(k)?
The same limit applies to both the Roth and traditional 401(k) deferrals. In 2006, the maximum deferral amount is $15,000. Participants over age 50 may make additional catch-up deferrals of up to $5,000.

Some people may find that without the tax savings, they cannot afford to contribute as much to a Roth 401(k) as they can to a regular 401(k). For example, a $200 pre-tax contribution to a 401(k) plan is equivalent to a $140 after-tax contribution to a Roth.

Can I put the age 50 catch-up contribution into a Roth 401(k)?
Yes.

Can I make both regular 401(k) deferrals and Roth 401(k) deferrals in the same year?
Yes, as long as the amounts added together do not exceed the calendar year limits for deferrals.

Once I make the Roth 401(k) deferral can I have it changed into a regular deferral?
No.

Can I convert a regular deferral into a Roth 401(k) deferral if I pay taxes on the amount converted?
No.

I already have a Roth IRA, can I participate in a Roth 401(k) plan?
Yes.

In my Roth IRA I do not have to take required minimum distributions at age 70-1/2. Will I have to from my Roth 401(k)?
Yes. Just like with a regular IRA and regular 401(k), you must take a minimum withdrawal each year beginning at age 70-1/2.

I cannot have a Roth IRA because of my income level; can I contribute to the Roth 401(k)?
Yes.

My employer matches the regular salary deferrals into the 401(k); will they match the Roth deferrals?
Yes, they may choose to do so, but the matching contribution will be made on a taxdeferred basis so they will not be exempt from taxation when withdrawn.

So when can I withdraw both the Roth contributions and earnings tax-free? What is a "qualified distribution"?
When the contribution has been in the plan for at least five years and you are at least age 59-1/2. These are called "qualified distributions".

Does this mean I can withdraw the Roth contributions while still working (in-service withdrawal)?
If your plan allows in-service withdrawals of regular contributions, it may permit inservice withdrawals of Roth contributions subject to the same restrictions covering pretax deferrals.

When does this five year period start? Does each contribution start a new five year waiting period?
The five year period starts with the first Roth contribution. Subsequent contributions do not start a new five year period.

What if I quit, am terminated or retire and wish to take out my Roth contributions before the five year period is over?
Further guidance is expected from the IRS on this issue, but currently it appears that while distributions are permitted for termination of employment, death, disability, and retirement, tax-free treatment on the earnings is only provided to "qualified distributions". A qualified distribution is one that is made after age 59-1/2, or on account of death or disability, and is made at least 5 years after the date the first designated Roth contribution was made. We presume that there will be a penalty for early distribution, but await further guidance in this regard.

When I leave, can I roll over the Roth 401(k)?
Yes, but only to a Roth IRA or another Roth 401(k).

Are the Roth contributions available for loans if my plan permits them?
Only if the plan modifies its loan policy to allow it, otherwise no.

Are Roth contributions available for hardship withdrawals if my plan permits them?
No, unless the plan adopts an amendment specifically allowing them.

Are Roth contributions available for in-service withdrawals if my plan permits them?
No, unless the plan adopts an amendment specifically allowing them.

So which is better, should I deduct now or enjoy tax-free income later?
This is a complicated situation with many factors to consider:

Do you think your tax bracket will be higher or lower when you retire?
If you are in a lower tax bracket today than you expect to be at retirement, then Roth contributions would make sense. If you are in a higher tax bracket now than you expect to be when you retire, than the traditional 401(k) would be the most advantageous. And, of course, unforeseeable changes in the tax laws could affect this.

Can you contribute more to a regular 401(k) than you can contribute to a Roth 401(k) because of the tax savings? If that's the case, then you will accumulate more money at retirement in a regular 401(k).

And, in some cases, switching to a Roth 401(k) will boost your taxable income enough to make you ineligible for certain tax credits (i.e. the Child Tax Credit).