Q. I'm interested in joining my company's 401(k) plan. I hear there's a new Roth 401(k) that's going to be coming out. Should I consider it?

A. You are correct — the new Roth 401(k) debuts on Jan. 1 and presents an alternative for people trying to map out their financial plans for retirement.

Both the traditional and Roth 401(k) let people and their employers contribute to a retirement plan. Deferrals for people under 50 are limited to $15,000 next year, or $20,000 above age 50.

The big difference is in how taxes are collected on the plan contributions and withdrawals.

Under the new Roth 401(k), contributions are made after taxes are taken out. Withdrawals are tax-free provided that the funds remain in the account at least five years and aren't taken out until you reach age 59 1/2.

Payroll contributions for traditional 401(k)s are made before taxes; withdrawals are taxed. A simplified example of this involving a $5,000 contribution demonstrates the difference.

A $5,000 contribution into a traditional 401(k) would cost you $5,000 and would reduce your taxable income by that amount. If the investment doubles to $10,000, a retiree in the 28 percent tax bracket would get only $7,200 after paying tax on the distribution.

The initial $5,000 contribution under the Roth 401(k) would cost a worker in the 28 percent bracket $6,944 because it is paid after taxes are taken out. At retirement, the Roth plan would pay out $10,000 tax-free.

While many people will opt for the traditional vehicle, others may find the Roth 401(k) appealing. Those include younger workers who don't have much of a tax burden now and higher wage earners who aren't eligible to contribute to a Roth IRA.

"For some people it does make sense," said Les Andrews, a Honolulu-based financial planner who specializes in 401(k) plans.

Younger workers who don't typically earn as much may find the new plan to their liking because they may end up paying a higher tax rate when they retire, said Ken Kaneshiro, a certified financial planner with Principal Financial Group's Hono-lulu office.

"This could be a tool they could use," Kaneshiro said. "A lot of them have their tax advisers tell them they need to establish Roth IRAs. The Roth 401(k) could be another conduit."

He said higher-income individuals such as executives who want to have some tax-exempt income in retirement may opt for the Roth 401(k). That's because the Roth IRA isn't available to married wage earners filing jointly and making more than $160,000 a year. For single tax filers, Roth IRAs are off limits to people making more than $110,000.

He said the Roth 401(k) shouldn't be seen as replacing the Roth IRA since some people may like the flexibility the IRA offers when it comes to withdrawing money. At the same time, the amount people can contribute to the Roth IRA is about a third of the 401(k)'s limit.

Another consideration for people contemplating Roth 401(k)s is whether tax rates will remain the same. If high-income individuals believe Congress will raise rates it may make sense for them start looking at tax-free retirement funds.

There also is some uncertainty about whether Roth 401(k)s are here to stay. The plans are being created under the Economic Growth and Tax Relief Reconciliation Act of 2001, a law that expires in 2010.

Kaneshiro said adoption rates will depend on how fast employers add the plan into their retirement offerings and public awareness. The Profit Sharing/401(k) Council of America last month said a survey found 17.4 percent of companies intended to add Roth 401(k) plans; about 41 percent were undecided.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.