Final Roth 401(k) Regs Issued
On December 30, 2005, Treasury and the Internal Revenue Service released the much awaited Roth 401(k) Final Regulations. These regulations, effective January 1, 2006, provide guidance concerning the requirements for designated Roth contributions under a qualified cash or deferred arrangement (CODA), or what is more popularly referred to as a 401(k) plan.
Under a Roth 401(k) option, a participant in a 401(k) can have his or her salary reduction contributions made out of after-tax pay. The funds would accumulate in the 401(k) tax free, and not be subject to taxation upon distribution (assuming certain conditions are met). The Roth 401(k) rules are generally subject to the same rules as regular pre-tax 401(k) contributions. A participant can not contribute more than the annual limits ($15,000 plus $5,000 catch-up in 2006), but can divide up his contributions among the two types.
While designated Roth contributions bear some similarity to Roth IRA contributions, there are many differences between the types of arrangements, including:
- Designated Roth contributions are not limited by income.
- Pre-tax elective contributions under a CODA may not be converted to a designated Roth account.
- Designated Roth contributions do not have the specific ordering rules for distributions that are imposed on Roth IRAs.
Similar rules will apply to designated Roth contributions available under 403(b) plans sponsored by tax-exempt organizations and public schools.
The Roth option could be beneficial for an employee who would be in a higher tax bracket when he or she receives the funds. It could also be beneficial for an older employee from a Social Security tax or estate planning standpoint.
The IRS also published some helpful FAQs.