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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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Starting a Roth 401(k) plan

originally posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If in doubt, please send a new question or ask for an update.

Q: We are a single-employee firm. With the advent of the new Roth 401(k), this may tip us over into implementing such a plan. Can you provide a plan incorporating these features: 1) Roth 401(k) 2) No employee matching, but payroll deductions. 3) Separate stock brokerage accounts self-directed by each employee with the ability to purchase funds, fixed income, etc. if desired. Your site mentions Ameritrade; we use Ameritrade as a custodian & broker, and would be happy with their standard brokerage accounts. The key point is the ability for plan participants to select individual stocks, since all employees are financially sophisticated. 4) Participants can take out loans against plan assets. Can your organization can set up a Roth 401(k) along these lines?

A: Your question states that you are asking about a one-person firm but then mentions "employees" in plural. You should first be aware that the planning, procedures and services available for a 401(k) plan vary significantly for one person (self-employed) businesses vs. those with common-law employees on payroll. The Roth 401(k) comes into existence in the law on January 1, 2006. There seems to be a public perception that this plan iis mmediately available for implementation by employers now but that is not the case. At this point none of the financial firms that administer 401(k) plans have released a Roth 401(k) prototype plan document that would be necessary to adapt the new benefit. So without the required legal document, it is too soon for us to discuss benefit plan details. There is no indication that any of the major financial firms will be "ready to go" immediately on January 1, 2006 although most 401(k) administration firms have announced that they expect to offer the Roth option sometime later in 2006. When this plan is available through financial firms in 2006 (including FreedomBenefits.org1), it will likely be offered as an option on the regular 401(k) rather than as a separate product. The procedures, pricing and other details are likely to be the same as for regular 401(k) plans. So the best approach is to select the best regular 401(k) plan now and simply adapt the Roth option when it becomes available sometime latter next year. Footnote: 1 Other previous OnlineAdviser questions addressed the topic of whether it makes sense to use a Freedom Benefits vs. another commercial 401(k) plan. Although Freedom Benefit offers inexpensive start-up, it is less expensive to over the long term an "off-the-shelf" commercial service rather than a custom-designed 401(k) plan from Freedom Benefits. This is especially true of one-person 401(k) plans. Only a few businesses with special financial and tax planning needs should consider adapting a custom-designed 401(k) plan.


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