RETIREMENT PLANNING/Save more for the future
New York City offers its employees a 457 plan and a 401(k) plan to help them save for retirement. More than 127,000 employees take advantage of the benefits, investing a percentage of their pre-tax earnings. When withdrawn, however, the income is taxed.
Because it can be hard to forecast what future taxes will be, some financial advisors advocate diversifying investments between pre-tax and after-tax accounts. That way, at least one of the accounts will perform better in retirement, regardless of the tax bite.
New York City officials wanted to offer employees an opportunity to diversify their retirement investments, so this year, they added an after-tax Roth 401(k) to employees’ retirement savings options. The plan features are similar to the Roth IRA and the pre-tax 457/401(k), but, unlike those plans, Roth contributions to the 401(k) are made after taxes, and the earnings on the contributions are tax-free when withdrawn as long as the participant is at least age 59 ½ and has had the account for at least five years. Unlike the Roth IRA, the Roth 401(k) has no income restrictions and has much higher annual contribution limits.
In choosing between the after-tax Roth 401(k) and the pre-tax 457/401(k), participants must decide when they would rather pay taxes. The Roth 401(k), like the Roth IRA, gives participants no tax break now, but participants do not pay taxes when they withdraw funds. If an employee believes that he will be in a lower tax bracket in retirement, the pre-tax 457/401(k) might work better for him, but if he expects to be in a higher tax bracket after he retires, the Roth 401(k) makes better sense.
To explain the new Roth feature of the 401(k) plan, the city used its existing Web-based software, Personalized Financial Snapshot, a retirement planning tool that helps participants think about their retirement needs. Through its record keeper, Greenwood Village, Colo.-based Great-West Life, the city worked with Corvallis, Ore.-based MoneyTree Software to develop and customize the software to include “Understanding the Roth 401(k),” a program designed to clearly illustrate the differences between pre-tax and post-tax (Roth) investing. The software summarizes the differences and concludes with a discussion on tax treatment. Employees can access the program through the New York City Deferred Compensation Plan’s Web site at nyc.gov/deferredcomp.
Contributions to the Roth started in April, and as of October 30, 2006, 11 percent of all accounts in the 401(k) plan were Roth accounts. New York City received a Leadership Recognition Award in the category of Effective Communication in 2006 from the Lexington, Ky.-based National Association of Government Defined Contribution Administrators (NAGDCA) for the communications program. NAGDCA presents the award annually to sponsors of 401(k), 403(b) and 457 plans to recognize outstanding achievements in effective communication or plan design and administration.