ROTH 401(k) Plan:

The ROTH 401(k) sounds a lot like a defined contribution 401(k) Plan that allows one to defer part of their salary into a tax-deductible and tax-deferred (retirement) savings account, but with the new ROTH 401(k) the tax-deduction is forfeited in return for the ability of participants to receive tax-free distributions after five years.

This new retirement plan, authorized by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), became available to participants as of January 1, 2006.

The IRS issued guidance as follows:

As with a regular 401(k) plan, an employee can elect to defer salary to the ROTH 401(k), but in this case the contributions are made on an after-tax basis. There is no current tax on any accumulations within the ROTH 401(k) plan. As with a ROTH IRA, qualified distributions from a ROTH 401(k) Plan are completely tax-free after five years if they are paid:

  • For a qualifying first-time home purchase;

  • At or after the death of the contributor; or

  • On account of disability; and,

  • After the recipient reaches age 59 ½

Distributions from ROTH 401(k) accounts intended for rollover are only permitted to be rolled over into other ROTH type accounts (i.e. either another ROTH 401(k) plan or a ROTH IRA).

The new regulations establish 3 (three) requirements for ROTH 401(k) plans:

  1. Employee contributions are to be treated by the employer as taxable compensation (as if the employee had received cash instead).

  2. The employee must make an irrevocable designation of a ROTH contribution at the time of the deferral.

  3. ROTH contributions must be maintained in a Separate Account (separate accounting applies to the contributions and earnings thereon until all ROTH contributions have first been distributed).

Most of the typical requirements and rules for qualified plans also apply to ROTH 401(k)s; however, unlike the ROTH IRA, the above contribution method is available for all plan participants, regardless of the amount of their income.

Additionally, in-life or “lifetime distributions” from a ROTH 401(k) plan are mandatory.

Is a ROTH 401(k) plan best for you?

As with most financial decisions this depends on your plans for retirement and the other resources currently or later available to you to meet your retirement needs. We recommend the assistance of a professional with respect to all of your retirement-planning needs.

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