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IRS Proposes Regulations for Roth 401(k) Plans
Washington, DC, March 4, 2005 – The IRS recently proposed regulations governing Roth contributions to 401(k) plans.
The Roth 401(k) contribution feature was created under the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. Beginning in 2006, employers that offer 401(k) plans to their employees will have the option of adding a Roth 401(k) feature, which will allow employees to save after-tax dollars in a separate account under their traditional 401(k) plan. Distributions from the account generally are tax free, once the participant reaches age 59½. An employee’s annual elective deferrals and designated Roth 401(k) contributions combined (before any permissible “catch-up” contributions for employees age 50 and over) must not exceed $15,000 in 2006.
In contrast, an employee’s elective deferrals to a 401(k) plan are made pre-tax, meaning the employee is not taxed on the amount contributed at the time of the contribution. These deferrals (and the associated earnings) generally are taxed when they are distributed from the plan. Unlike the Roth IRA, which is only available to individuals below a certain income level, there are no income restrictions on an employee’s eligibility to make Roth 401(k) contributions.
The regulations recently proposed by the IRS define the terms under which employees may make designated Roth 401(k) contributions. Among other things, the regulations state that:
- the employee must designate the amount of their Roth 401(k) contributions;
- the employer must not exclude Roth 401(k) contributions from an employee’s taxable income at the time of the contribution; and
- Roth 401(k) contributions must be maintained in a separate account within the employee’s 401(k) plan.