Employer Sponsored Plans New Feature
By Michael J. Bogdan, Esq.
Published in the July/August Edition
of the Canton Akron Edition MD News Magazine
Physicians are increasingly putting an emphasis on saving for retirement, and most are putting serious thought into the many benefits of employer sponsored retirement plans. When examining such plans, it does not take long to realize the benefits of 401(k) plans. However, many physicians may not realize the benefits of one of employer sponsored plans’ newest feature – the Roth 401(k) contribution.
Since January 1, 2006, employers sponsoring 401(k) plans have had the option of including a “Roth contribution” feature in the plan. Roth contributions allow plan participants to designate all or part of their deferral contributions to the plan as Roth contributions and it will be taxed in a manner similar to a Roth IRA. Normally 401(k) contributions are not subject to income tax when made, but are taxed at distribution. Any investment returns on the deferral contributions are also taxed at the time of distribution. Roth 401(k) contributions work in reverse fashion – the contributions are taxed up front, but eligible distributions are completely tax free.
By including a Roth contribution feature within your 401(k) plan, participants have extra flexibility in determining the best tax strategy to save for retirement. Additionally, Roth contributions offer the opportunity to save much more than could be contributed to a Roth IRA, and, unlike a Roth IRA, is available to high income individuals. Currently, many physicians would not be eligible to contribute to a Roth IRA due to the income limits. The Roth 401(k) allows high income individuals to reap the benefits associated with the characteristics of a Roth IRA within a 401(k) plan.
Many financial advisors, estate planners and tax professionals believe that doctors with high incomes would be better off making a contribution to a Roth 401(k) versus making the same contribution to a traditional 401(k) account. A medical professional who has the ability to make the maximum annual contribution of $44,000 to his or her qualified plan could be better served contributing to a Roth 401(k).
The Roth 401(k) is an optional plan feature that can be incorporated into an existing 401(k) plan. It does not require the adoption of a new plan, but merely the adoption of a plan amendment. Physicians wishing to add a Roth 401(k) should consult their advisers.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.