Amid the current economic turmoil, it’s important that physicians not lose sight of their retirement objectives and long-term financial goals. At the same time, physician groups should continue looking for ways to improve their defined benefit plans to better meet the needs of individual employees and partners.

One tool that often is overlooked when it comes to constructing physician benefit plans is the Roth 401(k). Like its more well-known cousin, the Roth IRA, the Roth 401(k) is designed to provide tax-free retirement income by assessing taxes at the front end, or at the time of the contribution. This feature contrasts with traditional IRAs and 401(k)’s, which allow for pre-tax contributions but require that distributions be taxed after retirement.

So the question is: Pay now or pay later? What’s the difference? In fact, both approaches have advantages and deciding which path makes the most sense can depend on an individual’s personal outlook and their expected tax bracket after retirement.

But whether a Roth 401(k) ultimately turns out to be the best choice or not, it is important that physicians be provided with the option. That’s why groups may want to consider adding this unique retirement tool to their portfolio of benefits.

Although many organizations are still unaware of its existence, the Roth 401(k) has been around since January 2006. With the Roth 401(k), the Internal Revenue Service eliminated the income restrictions that apply to the Roth IRA. Under Roth IRA guidelines, only married couples with an adjusted gross income of $160,000 or less or individuals with incomes of $110,000 or less can take advantage of the tax-free distribution benefit.

But because the Roth 401(k) does not have income limitations, it may be the ideal vehicle for high-earning physicians who seek to save for a tax-free retirement. Determining whether to pay taxes on retirement funds up front or pay them in the future is a decision a physician should make in consultation with their accountant or tax attorney.

Generally speaking, however, it may make sense to utilize a Roth 401(k) if you believe taxes are likely to be higher when you retire than they are now. On the other hand, if you expect your income to drop significantly after retirement, then you’ll probably fall into a lower tax bracket and it may make more sense to defer the taxes until then. It’s important to remember, however, that with a Roth 401(k), earnings accumulate on a tax-free basis. That means that all withdrawals in retirement – both principal contributions and accumulated earnings – are tax-free.

While both the traditional 401(k) and the Roth 401(k) are subject to maximum annual contributions (currently $16,500 for 2009), additional “catch-up” contributions are also available for those over the age of 50 (currently $5,500 for 2009).

The IRS also stipulates that you must have a Roth 401(k) in place for at least five years in order to take advantage of the tax-free distribution. Thus, for those that plan to retire in the next two or three years, the Roth 401(k) wouldn’t be the best option. Conversely, the Roth 401(k) may be a good solution for younger members of the group with a longer earning horizon. It is important to note that the IRS allows contributors to “mix and match” by directing a percentage of income to a traditional 401(k) and the balance to a Roth 401(k), providing they don’t exceed the total annual maximum contributions.

The Roth 401(k) can be a powerful means of accumulating retirement income for certain individuals. As a result, physician groups should talk to their benefit managers about offering this useful tool to better meet the diverse requirements of their physician partners and employees.

David A. Myrice, CPA, MBA, has specialized in business financial operations since 1981. He is a senior finance manager with CBIZ – MMP.