The year 2008 is just around the corner. Maybe it's time to consider a new retirement plan choice: the Roth 401(k).

If your income is too high for a tradition Roth IRA, this new kind of retirement account is worth looking into. While individuals with 2005 adjusted gross income of $110,000 or more can't open a Roth IRA, those restrictions do not apply to the Roth 401(k). But a lot of employers may not be offering it, and there are some concerns that it may be phased out in 2010. Is it still worth looking into? Retirement planners say yes.

401(k) vs. Roth 401(k)

Both Roth 401(k)s and traditional 401(k)s allow accumulated earnings to build in the account without facing current taxation.

Contributions to a traditional 401(k) come out of employee paychecks pretax and thus reduce a worker's taxable income in the year the contributions are made.

The downside: Every dollar that is withdrawn from a traditional 401(k) is taxable at ordinary income tax rates at retirement age, and that’s one of the big differences between these accounts.

While 401(k)s are subject to federal tax, distributions from Roth 401(k)s will be tax-free, just like withdrawals from Roth IRAs.

Current tax rates make Roth 401(k)s look even more attractive. After the Bush administration's two tax cuts, rates are at or near historic lows, for those in higher tax brackets.

Since tax rates are likely to be higher when you retire, the Roth 401(k) may have an advantage over its more conventional cousin.

Created in the 2001 tax law but unavailable until 2006, the Roth 401(k) may be offered by about 30 percent of employers as an alternative to a traditional 401(k), according to a survey by Hewitt Associates. So, even if you’re interested in this type of account, your employer may not offer it; it’s their choice.

Moreover, the Roth 401(k) is set to expire in 2010, unless Congress acts to extend it. This means investors will have a chance to fund a Roth 401(k) for a few years, then have to go back to their conventional 401(k). Advisers say that's no reason not to open a Roth 401(k), just something to keep in mind.

The maximum amount that can be invested in a conventional 401(k) or Roth 401(k) is the same. In 2006, workers under 50 years of age can save a maximum of $15,000. Those over 50 can save up to $20,000. All of the money can be invested in either type of account or it can be split between the two versions. Money invested in either 401(k) plan grows tax free. Penalty-free withdrawals start when you reach 59 1/2 and must start when you reach 70 1/2.

So, which account do you fund? Making a sound decision hinges on your estimation of the taxes you think you'll pay in retirement, says Michael Kitces, director of financial planning with the Pinnacle Advisory Group in Columbia, Md. And that is, by an estimate, hard to do.

Still, if you expect your tax rate to be the same or higher in retirement than it is now, you might be better off with a Roth 401(k). This is likely to be the case with young people who are just starting their careers and expect their income to increase in the future.

"For folks who are in the 15% or 25% tax bracket, it may not be a bad idea to pay those taxes now and never have to worry about what tax brackets might become in the future," says Kitces. If you're in your peak earning years, on the other hand, and you figure your tax bracket will be lower in retirement, you'll benefit from continuing with traditional 401(k) contributions.

Other Factors to Consider With the new Roth 401(k)

If employers match your 401(k) contributions, all of their money must go into a regular 401(k).

Except in the cases of hardship, withdrawals from a Roth 401(k) can only be made five years after your first contribution to the account.

While individuals with 2005 adjusted gross income of $110,000 or more can't open a Roth IRA, those restrictions do not apply for opening a Roth 401(k). When they leave their employer, they can roll their Roth 401(k) over into a Roth IRA no matter what their income level.

Workers who have both types of 401(k)s will have to keep good records so they know which distributions are taxable and which aren't.

If your employer offers the Roth version of this account, do your homework before deciding which type of 401(k) is best for you. Visit www.roth401k.com for more information.