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Law creates a new ND retirement option

Justin Tardiff | Wednesday, November 9, 2005

Thanks to a new federal law, Notre Dame employees will have a new retirement option available at the start of the new year.

The new accounts – called Roth 401(k) options – differ from the traditional 401(k) accounts by taxing worker’s money as they earn it instead of after they withdraw it, Notre Dame assistant professor of economics Jim Sullivan said.

The traditional 401(k) account allows workers to invest and save their money without taxation. The taxes are charged later, when workers go to withdraw money from their account.

The new Roth 401(k) option would tax workers’ money as they earn it, allowing them to withdraw money from their account tax-free later.

The law will go into effect Jan. 1, and most companies will provide the option sometime after then.

The new option will not be best for everyone, specifically taxpayers who are eligible for tax breaks that are based on taxable income, Sullivan said.

“The Roth 401(k) is most likely to be an attractive option for those who expect to be paying a higher tax rate in retirement than they do today,” Sullivan said.

This usually refers to younger workers who believe they will have a higher income later than they do now or those who believe the government will raise income tax rates in the future, Sullivan said.

Colette Sgambati, program assistant for research and policy at the Kroc Institute for International Peace Studies, said the new option is something she would consider.

“It’s good for me, because hopefully I will be making more money in the future,” Sgambati said. “I love having it taxed on the way in, then there are no surprises when you withdraw.”

Sgambati said she currently contributes to a traditional 401(k) account and a Roth IRA, so she would consider switching to the Roth 401(k) account when it is made available. But she does have reservations.

“The fact that the government passed a law making it an option makes me suspicious,” Sgambati said. “It just seems too good to be true. I would have to do my own research on it.”

Kamaria Porter, lead organizer of Notre Dame’s campus labor action project, stressed the importance of putting the new option in context.

“As a worker told me the other day, benefits don’t put food on the table,” Porter said. “While people should be able to plan for tomorrow, the needs of today must be addressed with a living wage and voice at work.”

The campus labor action project has been working to improve employee benefits.

“I think it’s important that employees at Notre Dame maintain and improve their benefits, including retirement plans, but we need to focus on ensuring a living wage and the dignity of the worker,” said Katie-Rose Hoover, a member of the campus labor action project.

Joe Murphy, another member of CLAP, agreed people need to put the change in perspective.

“Regardless of when you tax it, there is not enough there,” Murphy said. “That is the problem that needs to be addressed, instead of when it is taxed.”