Roth 401(k) Plans: Reviewing the Basics

Sponsors of 401(k) plans have been permitted to amend their plans to accept Roth (after-tax) contributions since 2006. Plan participants can benefit from having their Roth contributions grow with tax-free earnings, and their contributions can be distributed to them at retirement with no future income tax liability. Unlike a Roth IRA, participation has no income limit and contributions can go up to the maximum allowed in a traditional 401(k) plan.

Roth 401(k) Internal Revenue Code sets requirements

To offer a Roth 401(k) feature, the first requirement is that the employer must have a traditional 401(k) plan available. In addition:

• Participants must be permitted to designate some or all of their elective deferrals as Roth 401(k) contributions
• The employer must report Roth contributions in the employee’s income
• Roth deferrals have to be kept in a separate account

Participants may make both 401(k) and Roth contributions, but their total cannot exceed the annual maximum contribution limit set for 401(k) plans. Catch-up contributions for those age 50 or more are permitted, and are subject to the same limit as 401(k) catch-up contributions.

Distributions may be “qualified”

The rules applicable to 401(k) distributions are the same for Roth contributions. If permitted by the plan, distributions from Roth 401(k) accounts can be made upon termination of employment, death, disability, reaching age 59½ and hardship.

Tax-free “qualified” distributions can be made after the participant reaches age 59½, dies or becomes disabled. The participant’s first designated Roth contribution has to be made at least five years earlier.

For more information, including in-plan rollover rules, see the Internal Revenue Service’s Retirement Plans FAQs on Designated Roth Accounts at http://tinyurl.com/IRSRothFAQs.