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.
- What types of plans can allow Roth deferrals?
- Are there any income restrictions preventing higher wage earners from making Roth 401(k) contributions?
- What are the limits on the amount of Roth deferrals a participant can contribute?
- Can catch-up contributions be designated as Roth deferrals?
- What is all the buzz about Roth conversions in 2010?
- Can a participant elect to convert pre-tax 401(k) deferrals into Roth 401(k) deferrals?
- Can Roth 401(k) accounts be directly rolled over into another 401(k) plan or a Roth IRA?
- Can a Roth IRA be rolled over into a Roth 401(k) or 403(b)?
- What are the requirements that must be satisfied to receive a tax-free distribution from a Roth account?
- What is the five-year period and when does it start?
- Is the plan sponsor or the participant responsible for tracking the five-year period?
- Does the five-year period start over when a participant goes to work for another company and makes Roth deferrals into his new employer's plan?
- Is there any coordination between the Roth 401(k) and Roth IRA five-year periods?
- What happens if a participant takes a loan from the Roth account and then defaults, requiring deemed distribution of the outstanding balance?
- Do Roth deferrals affect ADP testing?
- Can availability of Roth deferrals be restricted to those whose incomes are high enough to maximize their contributions?
- Are Roth deferrals considered when calculating the employer matching contribution?
- Are Roth deferrals subject to Required Minimum Distributions?
- Do the automatic IRA rollover rules apply to Roth deferrals?
- Can a plan that does not otherwise allow Roth contributions accept a Roth rollover?
- Is the employer required to report any information at the time Roth deferrals are contributed to the plan?
- How are Roth distributions reported on Form 1099-R?
- Are there any reporting requirements for a participant who elects Roth deferrals?
- Which is better for participants — Roth or pre-tax deferrals?
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.