Designated Roth 401(k) Basic FAQs
Rev. 09/29/05, E-mail Alert 2005-19; Rev. 11/22/08; Rev. 10/24/13, E-mail Alert 2013-17
What is the basic difference in the concept of a Roth 401(k) deferral versus a “traditional” 401(k) pre-tax deferral?
With a Roth 401(k) deferral, the deferral amount is made in after-tax dollars and the earnings on the Roth deferrals will be tax-free if the contributions remain in the plan for at least five years after Roth deferrals commence AND the participant satisfies one of the following: 1) attaining age 59½, 2) death or 3) disability [as defined in section 72(m)(7)]. A traditional 401(k) deferral is tax deferred at the time of contribution and both the deferral and the earnings on the deferral are taxable when distributed.
How much can be put in a Roth 401(k)?
The 402(g) limit applies to both Roth 401(k) and traditional pre-tax deferrals. In 2013, the maximum deferral amount is $17,500, and participants who are 50 or over may make additional catch-up deferrals of up to $5,500. The total of an individual's pre-tax deferrals and Roth deferrals may not exceed the overall 402(g) limit (plus catch-up limit, if applicable) in effect for the calendar year.
May the participant make both pre-tax deferrals and Roth 401k deferrals in the same year?
A 401(k) plan may be designed to permit both the pre-tax deferrals and the Roth 401(k) after-tax deferrals. A 401(k) may not be designed to accept only Roth contributions.
When must the participant elect to make a Roth deferral?
The decision to characterize the deferral as a Roth contribution is irrevocably made at the time the participant completes the deferral election.
Does the Roth contribution have to stay in the plan for five years in order for the earnings to be tax-free?
Yes. To withdraw the earnings tax-free, the Roth contribution must remain in the plan for at least five years and the participant must have attained age 59½ or be dead or disabled.
Does the five-year period start as of the time of the first Roth contribution; or does each year’s Roth contribution have to be in the plan for five years before it is eligible to be withdrawn without taxation on the earnings?
The five-year period is determined starting with January 1 of the year of the first Roth contribution. A Roth contribution to the same plan in a subsequent year does not start a new five-year period.
How are the Roth and pre-tax deferrals accounted for in the plan?
The Roth and the pre-tax deferrals must be separately sourced and must be record kept separately. Earnings on the Roth contribution must be record kept separately from earnings on the pre-tax deferrals. Forfeitures may not be allocated to the Roth source.
Where are the Roth rules found?
The Roth 401k option was authorized as part of Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which added section 402A to the Internal Revenue Code. In addition, the IRS issued final regulations on December 29, 2005 and April 27, 2007. The 401(k) Roth is an optional plan provision that the plan sponsor must incorporate into the plan document for Roth deferrals to be available to the participant.
May a 403(b) arrangement have Roth 403(b) contributions?
May a governmental 457(b) plan have a Roth provision?
Yes, this started in 2011.
Roth IRAs have an income limit for eligibility to make contributions. Are there income limits on Roth 401(k) contributions?
No. Unlike the Roth IRA, where individuals whose adjusted gross income (AGI) exceeds specified limits are not eligible to contribute to a Roth IRA; all participants in a qualified plan may make Roth 401(k) contributions regardless of the individual’s AGI.
May an individual have both a Roth IRA and participate in Roth 401(k) plan?
Yes, provided he or she is eligible for both.
May catch-up contributions be made as 401(k) Roth contributions?
Are Roth 401(k)s part of the sunset provisions of EGTRRA?
Yes. However, in the Pension Protection Act of 2006, the Roth provisions were made permanent.
May matching contributions be made on Roth contributions?
Yes. However, the matching contributions are tax-deferred rather than exempt from taxation.
What happens if the Roth funds are withdrawn prior to five years and age 59½?
Generally, Roth distributions under age 59½ are not qualified distributions, unless the Roth contributions have met the five-year requirement and the individual is deceased or disabled. Otherwise, under age 59½ Roth distributions are not qualified distributions and consist of a pro-rata amount of Roth contributions and earnings on the Roth contributions. The earnings are taxable and if the participant is under 59½ may be subject to a 10% penalty.
If Roth contributions are permitted in the plan, is it a given that younger workers will benefit more from the Roth contribution then from the pre-tax contribution?
There are so many variables that it is impossible to generalize. Each participant must take into consideration his or her own personal circumstances.
Checkout Newkirk’s Roth 401(k) calculator for how to determine what is best for each individual scenario and other Newkirk Products.
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