Roth IRAs have become extremely popular retirement tools, but the minimal Roth IRA contribution limits and participant Roth IRA income limits have prevented many people from using them. The Economic Growth and Tax Relief Reconciliation Act of 2001 provided for designating Roth IRA contributions within a prequalified plan. Now many individuals previously excluded because of Roth IRA rules can take advantage of the tax-free growth of Roth IRA contributions through a Roth 401(k).

The Roth 401(k) is a feature that can be added to a new or existing company-sponsored and defined contribution pension plan, including traditional 401(k)s, safe harbor 401(k)s, and 403(b) tax-sheltered annuities. Employees may elect to designate a portion or all of their elective contributions as Roth IRA contributions. Contributions are included in gross income at the time the employee would have received the contribution amounts in cash if the employee had not made the cash or deferred election. Earnings on the account accumulate tax-free, and distributions, if they are qualified, are tax-free.

A qualified distribution is one that is "seasoned," or that occurs at least five years after the year of the participant's first designated Roth IRA contribution - and is made on or after the participant reaches age 59 1/2 , because of the participant's disability or after the participant's death.

An individual can choose to make both traditional pretax and Roth IRA-designated contributions in a plan year. In 2008, an individual has a combined elective contribution limit of $15,500 for all designated Roth IRA contributions and traditional pretax Traditional IRA and 401k contributions (with an additional $5,000 if the participant is age 50 or older). The maximum employee and employer combined annual contribution must be the lesser of $46,000 or 100% of compensation.

Employers may match Roth IRA contributions, but these contributions cannot be added to the Roth IRA account. Rather the employer monies must be segregated in pretax fund account that must be kept and accounted for independently and separately. While the employee's contributions to the employee's Roth IRA may be withdrawn tax-free, the employer-matched contributions will be treated as ordinary income at the time of withdrawal.

Because the 401(k) plan will allow for pretax contributions that are includible in income when distributes (for traditional and employer-matched contributions) and contributions made with after-tax income that will be distributed tax-free (for Roth IRA contributions), there must be separate accounts and separate recordkeeping for the different types of contributions.

While a traditional IRA could be rolled over into a Roth IRA, there are no rules that allows for converting a pretax elective contribution account under a 401(k) to a designated Roth IRA account. A direct rollover of a distribution from a Roth 401(k) may only be made to another Roth IRA elective deferral account, such as another Roth 401(k) or a Roth IRA.

Roth 401ks are most appropriate for individuals who would like to contribute to a Roth IRA for tax-free growth but are unable to do so because of income limitations or who would like to contribute more than they currently can under the IRA rules. In general, younger individuals saving for retirement and those who expect their tax bracket to increase would benefit greatly from making Roth IRA designations.