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MADISON, Wis. – A new retirement plan that carries the enticing appeal of tax-free withdrawals made its debut with the new year. On Jan. 1, some employers began offering the new Roth 401(k) plan to employees. The main selling point is taxes are paid on contributions to the plan but employees won’t have to pay taxes on the earnings when they withdraw the money. According to CUNA Mutual Group, earnings and withdrawals are not taxed on Roth 401(k) contributions if the distribution satisfies both of the following requirements: the withdrawal occurs after age 59-and-a-half; and if five years have passed since the date of the first Roth 401(k) contribution to the plan. Traditional 401(k) plan contributions are made with pre-tax dollars and earnings grow tax-free until the money is withdrawn. With the Roth 401(k) plan, unlike its Roth individual retirement account cousin, which isn’t available to those with high incomes, there are no income limits with the new plan. Employer-matched funds cannot be contributed to a Roth 401(k) but will have to be put into a traditional 401(k) account. Employees can contribute up to $15,000 for 2006, as in a 401(k) plan, and the limit reaches $20,000 for individuals turning 50 years of age or older by the end of the year. The Roth 401(k) plan might appeal more to younger employees because they’re typically in a lower tax bracket, said Sharon Severson, assistant vice president, Pension Client Services, CUNA Mutual. Older, higher-paid employees also stand to benefit because they generally will have more retirement money saved and can pay taxes today at a lower rate versus paying a higher tax rate later. For those in between those groups, “they’re probably better off in pre-taxed,” Severson said. Still, “you have to be of the opinion that a Roth is the best thing to do,” Severson said. “From a tax position, you will pay more in taxes at retirement but from an individual standpoint, if you think Roths are the best thing and you aren’t able to contribute to a Roth IRA, you now have the ability to do so,” Severson said. The plans have only been available for a few weeks so not many employers have started offering them. So far, only a “small number” of credit unions have adopted Roth 401(k)s, Severson said, adding probably less than 20% of (the entire pension industry) has actually adopted them. “We’re hearing a lot of people talk about it but credit unions are of the opinion they will wait and see,” Severson noticed. “You can adopt the plan at any time. Once adopted, the contributions have to be classified as Roth or not.” To implement the new plan, credit unions can work with their document provider but Severson cautions against rushing out to have them set up. “Before (credit unions) rush into it, they have to determine whether the workforce is clamoring for it,” she recommended. “If no one is asking for it, that’s one less complexity to worry about.” Credit unions also need to determine if its payroll system is set up to handle the new contributions, Severson said. There are also additional reporting document requirements needed on employees’ W-2s. CUNA Mutual has a suite of online information and implementation tools for credit unions interested in offering a Roth 401(k) program to their employees. Meanwhile, this new account option will expire in 2010 unless Congress acts to continue its availability. Funds contributed will still be available as intended after the 2010 sunset, but the post-tax contribution option may no longer be available. [email protected]

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