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Posted by studiocenter on Jun 1, 2010

Designated Roth contributions (a/k/a Roth 401(k) or Roth deferrals) have been available since 2006, but a change in the tax laws governing Roth IRAs has reenergized discussions about this feature. This article is in Q&A format and addresses some of the more common questions about Roth 401(k) contributions. But first, a brief overview…

Traditional deferrals reduce a participant's income for federal and, in most cases, state tax purposes at the time of contribution. Those amounts grow on a tax-deferred basis until the participant takes a distribution, which is taxable as ordinary income. Roth deferrals are fully taxable to the participant at the time of contribution. However, if certain requirements are met, so-called "qualified distributions" of Roth deferrals and the earnings thereon are completely tax free.

Apart from the tax differences, Roth deferrals are treated the same as traditional deferrals for all plan purposes. The normal limits and non-discrimination requirements apply. Roth deferrals are also subject to the same withdrawal restrictions, i.e. death, disability, retirement, financial hardship, etc.

This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.

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