The IRS is finalizing regulations for a new kind of investment account that combines many of the features of Roth IRAs and company-sponsored 401(k) accounts. These “Roth 401(k) accounts” are expected to become available next year.

Let’s review:

• 401(k)s, 403(b)s and 457 plans let workers deduct up to $14,000 from their taxable income ($15,000 next year) and invest it tax deferred. Withdrawals are taxed as ordinary income.
• Traditional IRAs also are tax deferred but contribution limits are $4,000 this year ($5,000 in 2007). Older workers can add $500 more. Withdrawals also are taxed as ordinary income.
• Roth IRAs are not deductible from current income, but investments grow tax-free and there are no taxes on withdrawals unless they are made early.

The new Roth 401(k)s are a hybrid: Savers will be able to put away up to $15,000 next year ($20,000 if you're older than 50) with no immediate tax savings, but withdrawals will be tax-free as long as the savings are left in the account for at least five years (there will likely be some mandatory withdrawals after age 70½). There can be employer matching, as there is in regular 401(k) accounts. It’s not yet clear how, or who, will set restrictions on how these funds can be invested.

The possibility of employer matching might just open up a new avenue for union negotiators when current contracts are renewed. If the final regulations from the IRS clear the way for both public and private employers to participate, this could offer a way to supplement current retirement contributions.

—DK

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