New for 2006: Roth 401(k)s.

• Author: Oleasz, David M.

The Economic Growth and Tax Relief Reconciliation Act of 2001, Section 617, adding Sec. 402A, established the ability of Sec. 401(k) plan participants to designate part or all of their plan contributions as Roth contributions. The provision is scheduled to become effective on Jan. 1,2006, for plans that have been amended to allow such contributions. While contributions are not excluded from income, distributions will not be taxed, provided certain criteria are met. This item discusses some of the contribution and distribution rules.

Qualifying Contributions

To qualify as designated Roth 401(k) contributions, three requirements must be met. First, the employee must irrevocably designate amounts as Roth contributions at the time of the cash or deferred election. The taxpayer cannot decide later that tax savings are needed for the current year and redesignate the contributions to a regular Sec. 401(k) plan. Second, contributions must be included in the employee's income at the time the employee would have received the funds had he or she not elected to contribute to the qualified Roth contribution program. Finally, amounts must be maintained by the plan in a separate, designated Roth account.

Nontaxable Distributions

For distributions from a Roth 401(k) to be nontaxable, they must occur after the five-year period beginning with the tax year of the employee's first contribution. Distributions must be made (1) on or after the taxpayer attains age 59 1/2, (2) after the taxpayer's death or (3) on account of the taxpayer's disability.

Advantages

The designated Roth 401(k) provides an attractive new retirement savings opportunity for taxpayers...