Academic journal article Journal of Accountancy

Starting in 2006: Roth 401(k)s: Another Way to Save for Retirement

Academic journal article Journal of Accountancy

Starting in 2006: Roth 401(k)s: Another Way to Save for Retirement

Article excerpt

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (section 617) added a provision allowing IRC section 401(k) plan participants to designate part or all of their plan contributions as Roth 401 (k) contributions. IRC section 402A--the new EGTRRA provision--is scheduled to become effective on January 1, 2006, for 401(k) plans that have been amended to allow such contributions.

Although contributions are not excluded from income, distributions will not be taxed, provided certain criteria are met. CPAs should become familiar with the law and with the proposed regulations, issued in March 2005, to advise employer or worker clients.

ELIGIBLE CONTRIBUTIONS

A designated Roth 401(k) contribution must meet three requirements to qualify as such. First, the employee must irrevocably designate amounts as Roth 401(k) contributions when electing to defer compensation. The taxpayer cannot decide later that tax savings are needed for the current year and re-designate the contribution as having been made to a regular IRC section 401(k) plan. Employees can change or revoke the designation only for future deferrals.

Second, contributions must be included in income at the time the employee would have received the funds had he or she not elected to contribute to the qualified Roth contribution program. Finally, deferred amounts must be maintained by the plan in a separate, designated Roth account.

NONTAXABILITY OF DISTRIBUTIONS

For distributions from a Roth 401(k) to be nontaxable, they must occur after the five-year period beginning with the tax year of the employee's first contribution. Distributions must be made (1) on or after the taxpayer attains age 59 1/2, (2) after the taxpayer's death or (3) on account of the taxpayer's disability. …

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