Employees who enroll in a Roth 401(k) plan will set aside money from their paychecks after it has been taxed, but the money can then grow on a tax-deferred basis and contributions and earnings can eventually be withdrawn tax free. It’s this particular tax treatment that distinguishes the Roth 401(k) plan from the traditional 401(k) plan. The Roth 401(k) has features that may be attractive to you, depending on current income tax rate, future income expectations, the number of years you have to save, and your estimated tax rate in retirement.

How the Roth 401(k) Works

A look at the rules governing Roth 401(k) plans may help you decide whether they would work to your advantage.

A 401(k) (either a ROTH or Traditional) plan participant may contribute up to $16,500 in 2011. An additional $5,500 in catch-up contributions is allowed if you are age 50 or older.

You can withdraw money from the Roth 401(k) without paying tax or penalties provided you are at least age 59½ and have held the account for five years or longer. These are the same rules that apply to Roth IRAs.

Just as with a traditional 401(k), you will need to begin taking minimum distributions (RMDs) after you reach age 70½.

You can roll over your Roth 401(k) plan assets to a Roth IRA when you retire or change employers.

Comparison With Roth IRAs

The tax treatment of the Roth 401(k) plan is basically the same as that of the Roth IRA. Both accept after-tax contributions and both allow tax-free withdrawals beginning at age 59½, provided contributions began at least five years earlier.

But there are significant differences to consider. Aspects of the Roth 401(k) plan are either more or less generous than those available in a Roth IRA. For example, un a Roth IRA, the Roth 401(k) plan has no income restrictions. As a result, the Roth 401(k) may be attractive to higher-paid employees who have been unable to contribute to a Roth IRA. And the annual contribution limit for the new Roth 401(k) is much higher than the Roth IRA. On the other hand, the Roth 401(k) has one drawback compared with the Roth IRA. Un the Roth IRA, which has no minimum distribution requirements, minimum distributions from a Roth 401(k) generally must begin in the year after the participant turns age 70½. However, the assets in a Roth 401(k) can be rolled into a Roth IRA if the employee retires or leaves the company, which would eliminate this requirement....

One of the biggest questions that will pop into the minds of baby boomers this summer as they catch some rays at the beach is whether or not to convert their IRA to a Roth IRA.

Simply put, a Roth IRA is different from a regular IRA in two ways: No distributions are required to be made during the participant’s lifetime and any distributions, after 5 years of the conversion, are income tax free – but remember the income taxes are paid in the year converting to a Roth. In other words, you would be paying the income tax up front in order for future appreciation and income to never be subject to income taxes again.

Note: There is special rule for any conversion to a Roth IRA made in 2010 – a taxpayer can elect to have one-half of the income taxed on the 2011 income tax return and the other one-half of the income taxed on the 2012 income tax return.

So, what should a person do? Well, it depends!

It depends on whether or not you will need the money in the IRA to live on and whether you can pay the income tax with assets that are held outside of the IRA. It depends on who you want to leave your IRA to when you die and your age and life expectancy . It depends on your current income tax rate vs. your future income tax rate and whether you believe that income tax rates will be increasing in the future. It depends on your state tax laws and how they tax distributions from IRAs. Finally, it depends on whether you want to pay the income tax on your IRA in 2011 and 2012 in order to escape income taxation on future earnings. It depends on whether you have a taxable estate for estate tax purposes . It depends on the future earnings and tax rates of the beneficiaries of your IRA.

Generally, in order for a Roth IRA to be beneficial for the person doing the conversion, that person must pay the income tax from assets outside of the IRA and must outlive the conversion by 20 or so years in order for the income tax free future earnings to compensate for the payment of the income taxes when the IRA was converted to a Roth. Exactly how long depends on what investment return is assumed for the newly converted Roth IRA and what assumption is being made for future income tax rates. However, if you assume you will never need to use the Roth IRA, then a conversion will generally make sense and is dependent on the value of your estate and what your estate plan says.

Simple rules that are applicable to most people:

Here are some simple rules that are applicable to most people. However, you should not follow these rules without first getting advice from your accountant, tax lawyer and/or financial planner.

1. If you will need the money in your IRA in the near future, converting to a Roth IRA does not make sense.

2. If you will not need the money in your IRA ever, or at least for 20 plus years, then converting to a Roth IRA may make sense, especially if you are going to leave your IRA (now a Roth ...