New Option in Retirement Savings: Roth 401Ks

There's a new way to save for retirement. The Roth 401K has tax advantages for some workers, but companies have been slow to offer the new product to workers.

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RENEE MONTAGNE, host:

On Fridays our business news focuses on your money. Today a new option in retirement savings.

Last month, some employers began offering workers something besides the traditional 401K. The new Roth 401K allows employees to put aside some of their after-tax salary and withdraw it later, tax free.

Virginia McNally reports.

Mr. BARRY PICKER (Accountant, New York): Hi Svetlana(ph). This is Barry Picker.

VIRGINIA MCNALLY reporting:

The small accounting firm of Picker, Weinberg and Auerbach in Brooklyn signed up for the new Roth 401K right away on January 2nd. Barry Picker says he's putting some money into the Roth 401K himself, and offering it to his employees.

Mr. PICKER: When I need that money, I'd like to know that whatever I need I can take out of that account and its there without having to diminish it by having to pay taxes on it.

MCNALLY: The Roth 401K is similar to the Roth IRA in that people contribute money after taxes. In other words, from their take-home pay. When you retire and take money out, you pay no taxes on the investment or on the income it's earned.

Barry Picker's partner, Seymour Weinberg, is 62. He says the Roth 401K works for him because he has no plans to retire.

Mr. SEYMOUR WEINBERG (Accountant, New York): I want to be taxed now as opposed to later on. That's exactly what I want to do right now, and that's why it's a good option for me.

MCNALLY: Theresa Ward, Vice President at Oppenheimer Funds, says the Roth 401K is convenient because it's done at work. She says it's not widely available through employers yet.

Ms. THERESA WARD (Vice President, Oppenheimer Funds): But it does take some time for the plan's sponsors to get the accounts set up in their programs and communicate it to participants and get participants to sign on to it.

So there's a little bit of a time horizon there. So I think we'll see, as we get closer to the end of the year, a lot more companies offering it and as a result, a lot more employees taking advantage of the after-tax savings opportunities.

MCNALLY: But Brett Goldstein, president of the Pension Department, a retirement planning firm in Plainview, Long Island, believes people who are struggling to pay high heating and gasoline bills might not be able to afford giving up a tax break now for a tax break at retirement.

Mr. BRETT GOLDSTEIN (President, Pension Department): The regular 401K is, you put money in on a pre-tax basis, so you're actually getting taxed at a lower rate. If you're making, let's say $50,000 dollars, and you're putting money into the 401K, let's say you're putting $3,000 into the 401K, you're going to be taxed at $47,000 dollars as opposed to let's say $50,000 dollars. So you're getting a tax break on today's money.

MCNALLY: Goldstein says some people are solving that problem by keeping their traditional 401K to get the tax break now, and putting a little in the Roth 401K to take advantage of the savings at retirement.

For NPR News, I'm Virginia McNally in New York.

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