Your employer-sponsored retirement program may soon offer another exciting way to save for your ideal retirement—a Roth contribution. Check with your employer for details. Basically, a Roth contribution lets you put aside after-tax dollars for your retirement. Why make after-tax Roth contributions to your retirement program?  Simple—Roth contributions grow tax-deferred and can be withdrawn at retirement completely income tax-free.

A Roth contribution isn’t separate from your existing retirement program. Rather, it’s a new element of the program. The Roth contribution feature of your retirement program combines characteristics of a traditional retirement program with those of the Roth IRA.

More specifically, the Roth contribution allows participants to make some or all retirement program contributions with after-tax dollars. In other words, instead of having all of your contributions deducted from your paycheck before taxes, you can designate some of those contributions to be put into your retirement account as after-tax Roth dollars. It’s still part of your retirement savings—the money is just held separately as Roth contributions. And, if you meet certain requirements down the road, the Roth money you withdraw at retirement—including earnings—won’t be taxable.

Just like traditional before-tax contributions to a retirement program, a Roth contribution is an easy and convenient way to save for retirement. Here are a few of the benefits:

• They can provide tax-free income at retirement.
• If your tax rate will be higher in retirement, you may benefit by making after-tax Roth contributions and taking tax-free distributions in the future.
• A Roth contribution provides similar tax benefits as a Roth IRA—and contribution limits are higher.
• There are no income limit restrictions. As long as you’re enrolled in your retirement program, you’re eligible to make a Roth contribution.
• If your employer currently matches your before-tax contributions, it’s possible that your Roth contributions will be matched using a similar formula (any match amounts would be non-Roth money).
• If you decide to make a Roth contribution, you may still put additional money in a Roth IRA—as long as you meet the Roth IRA contribution rules. In fact, if you want to maximize your retirement savings, it may be a good idea to contribute money to both.

So, how much can you contribute? In 2008, you can make a combination of before-tax and Roth contributions up to $15,500. If you’re age 50 or older, you can contribute an additional $5,000. If you choose to, you can make both before-tax and Roth contributions to your retirement account, but remember—federal tax limits apply to the combined total of those contributions.

You can’t reclassify your existing before-tax account balance as a Roth account. Similarly, after you make Roth contributions, you can’t reclassify them as before-tax. So be sure to weigh your options carefully before designating which type of contribution(s) you wish to make to the retirement program. However you will be able to change how you direct future contributions.

Keep in mind, Roth contributions are subject to taxes—just like regular income. So the downside is that you pay those taxes when you make the Roth contribution. That’s different from regular before-tax contributions: With before-tax contributions, you defer your tax obligation to a later date—when you withdraw the funds. The upside with Roth contributions is that your Roth withdrawals in retirement—including any earnings—are completely tax-free if you meet certain requirements. It’s really up to you.

Which raises an interesting question—should you only make Roth contributions, before-tax contributions, or both? Again, the choice is yours. One thing to consider is your income tax bracket in retirement.

• If your tax rate in retirement will be higher than it is today—putting you in a higher income tax bracket—making designated Roth contributions may make sense for you.
• If your tax rate will be lower in retirement than in your working years, you may benefit more from making before-tax contributions and deferring your tax obligation until retirement.
• With tax rates in retirement being uncertain, you may choose to diversify by making both before-tax and Roth contributions to your retirement program.

To model your own scenarios, visit our Roth contributions calculator. The calculator will compare the two different types of contributions and help you make the best decision for your individual circumstances.

Of course, no one can predict what the income tax rates will be in the future, so you should talk to your accountant or tax consultant before making your contribution elections to determine which type may be best for your situation.

Roth contributions are elective and you’re always 100 percent vested in the money you put aside. That means you own the money you contribute to your retirement account from day one. However, you have to meet a few basic requirements before you’re eligible to take designated Roth dollars from your retirement account tax-free. To qualify for a tax-free distribution, you must:

• Generally wait at least five years after making your first Roth contribution before taking a distribution
• And the distribution must occur after:
  • You reach age 59 ½ or older
  • Your death, or
  • Your disability

If you take a distribution and it doesn’t meet these qualifications, your accumulated Roth earnings will be taxed, and may be subject to an early distribution penalty.  Remember that you must meet your plan’s general requirements for withdrawals of elective deferrals before you can take a distribution of Roth amounts.

Required minimum distribution rules also apply to Roth contributions. That means you generally must begin taking distributions from your account during the year you reach age 70 1/2. This is different than the Roth IRA, which has no lifetime minimum distribution requirements.

You Can Take It With You
If you leave your employer for any reason, you can take your Roth contributions with you if you choose. You have the option to roll your contributions into another employer’s qualified retirement program, but only if it permits Roth contribution accounts. Your other option is to roll your Roth account over to a Roth IRA.

Remember, it’s your choice to make before-tax or Roth contributions. Whatever you decide, start early and save as much as you can so you can enjoy a long and active retirement.

This is general information, and actual provisions will be determined by your retirement program provisions.

Prudential, its affiliates and its sales professionals do not render tax or legal advice.