THE ROTH 401(K) option provides a distinctly alternative tax benefit to the traditional 401(k) model and offers more flexibility in retirement planning.

Employees contributing to a Roth 401(k) can choose to have contributions made on an after-tax basis.  Unlike traditional 401(k) deferrals that are not taxed in the contribution year¹, Roth contributions are taxed at current federal income tax rates along with any applicable state and local rates—the same as regular wages.

Plan earnings on Roth 401(k) contributions, however, are not taxed while the money is held in the plan, the same as with the traditional 401(k). Of course, tax-qualified plans, such as an IRA or a 401(k), are tax deferred and subject to required minimum distributions regardless of whether or not they are funded with an annuity. When a participant retires and is ready to begin withdrawing money from the Roth 401(k), contributions are returned along with any plan earnings tax free, assuming certain standard tax law requirements are met.

This is the opposite of a traditional 401(k) where pretax contributions and accumulated earnings are generally taxed on withdrawal at ordinary income-tax rates. Tax issues involving a Roth 401(k) can be complex.

Here are answers to some commonly asked questions about the Roth 401(k).

Q. What is the maximum contribution?

A. Roth 401(k) contributions are made with after-tax dollars instead of pre-tax dollars and are only allowed if the Roth feature is selected as an option for the plan. Both pre- and after-tax contributions can be made to a 401(k); however, both contributions must meet one combined contribution limit. In 2007, the maximum contribution to 401(k) plans, including both traditional and Roth contributions, cannot exceed $15,500 plus any catch-up contributions.

Taxation on the earnings of Roth contributions can be deferred by rolling over these benefits to another qualified plan that accepts Roth contributions or a Roth IRA. The Roth contributions and earnings from the plan permits tax-free qualified withdrawals five years after the first Roth 401(k) contribution and when the participant has reached age 59 ½, has died, or becomes disabled.

Q. From which will the participants benefit most:   401(k) contributions or traditional 401(k) deferrals?

A. Roth 401(k) contributions can mean more money upon retirement and after all taxes are paid.  Depending on individual situations, Roth 401(k) contributions may be very beneficial, even with the upfront taxes. However, several factors both current and future influence what the benefits will be, including age; expected age of retirement; tax bracket; expected tax bracket at retirement; and contribution amounts. The types of participants who generally benefit from a Roth 401(k) include:

·    Younger and lower-paid participants who would pay little tax on their contributions now and who have many years to accumulate potentially tax-free earnings;

·    Participants who will be in the same or higher tax bracket in retirement as in their working years;

·    Highly compensated participants who cannot contribute to a Roth IRA due to the tax law’s income restriction; and

·    Participants who prefer to pay taxes now to gain tax-free treatment for future plan withdrawals—and not take a chance that tax rates will be higher in the future.

Q. What are the advantages of adding the Roth 401(k) feature to the plan?

A. Roth 401(k) advantages include:

•   Contributions are conveniently made via payroll deductions;

•   Employers may match based on individuals’ Roth 401(k) contributions; however the employer match will still be pre-tax;

•   Maximizing contributions may yield greater after-tax retirement income, as qualifying withdrawals are tax-free; and

•   There is no restricted eligibility for making Roth 401(k) contributions.

¹ A10% federal tax penalty may apply if withdrawals are taken prior to age 59 ½.

Additional Information

When considering funding a tax-qualified retirement plan with an annuity, keep in mind that an annuity does not provide any additional tax-deferred treatment of earnings beyond the treatment provided by the tax-qualified retirement plan itself. However annuities do provide other features and benefits, including but not limited to a guaranteed death benefit and income options, for which a mortality and expense risk fee is charged.

Roth 401(k) withdrawals are typically not taxed if the money is distributed after age 59 ½ or on account of death or disability, as defined for Social Security disability purposes, and the withdrawal is made more than five years after the first Roth 401(k) contribution. This is known as a “qualified” distribution. Even when these requirements are not met, Roth 401(k) contributions are not taxed, but withdrawals of plan earnings may be subject to ordinary income tax and a federal 10% tax penalty may also apply.

A prospectus for the underlying investment options is available by calling 877-814-401k. The prospectus contains the investment objectives, risks, fees, charges, expenses and other information regarding the underlying investment options, which should be considered carefully before investing. Please read the prospectus carefully before investing. The unallocated group variable annuity funding Polaris401(k) is an unregistered product without a contract prospectus.

This material was prepared to support the marketing of Polaris401(k). Please keep in mind that neither AIG SunAmerica Life nor its representatives may give tax, accounting, or legal advice. Any tax statements in this material were not intended or written to be used, and cannot be used by any taxpayer for the purpose of avoiding U.S. federal, state or local tax penalties. You should seek the advice and counsel of an independent tax advisor for complete information concerning your particular circumstances and regarding any tax statements made herein.

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