The advent of the Roth 401(k) option became a reality in 2006, a provision resulting from the Economic Growth and Tax Relief Reconciliation Act of 2001. A 401(k) plan may now allow employees to designate some or all of their elective contributions as Roth contributions. Unlike regular 401(k) contributions, which are excluded from the employee's taxable income, any amount designated as a Roth contribution would be included as taxable income to the employee. But any qualified distribution from designated Roth contributions, and the related earnings thereon, is completely free from federal tax. Also, unlike regular contributions, Roth 401(k) contributions are allowable regardless of one’s income level. So, for many taxpayers, this could be the only way that they could participate in a Roth account.

In order to make this happen, the company that administers the 401(k) plan will have to perform additional accounting. The Roth 401(k), and the associated earnings, will have to be maintained in a separate account from the regular 401(k) monies. Additionally, the administrator will be required to separately allocate, on a reasonable and consistent basis, gains and losses between the designated Roth contribution account and other accounts under the plan. Because of this increased accounting requirement, it is virtually assured that fees to administer these types of plans will increase.

One of the drawbacks to the Roth 401(k) plan is that no employer matching contributions or plan forfeitures can be allocated to the Roth contribution account. That means that the only amounts that will be in the Roth account are the employee's post-tax contributions and the related earnings on those contributions.