Beginning January 1, 2006, a new type of savings
plan became available. The Roth 401(k) is an
account to which you can make contributions in
excess of the normal Roth IRA contribution limits.
How Does a Roth 401(k) Work?
A designated Roth account is a separate account
under a section 401(k) plan to which designated
Roth contributions are made. Designated Roth
contributions are a new type of contribution that
can be accepted by new or existing 401(k) plans.
If your employer’s plan adopts this feature, you can
designate some or all of your elective contributions
as designated Roth contributions rather than
traditional, pre-tax elective contributions.
Designated Roth contributions must be kept
completely separate from previous and current
401(k) pre-tax elective contributions. Contributions
to a Roth 401(k) are not excluded from income.
How Much Can I Contribute?
The combined amount you can contribute to all
designated Roth accounts and traditional pre-tax
accounts in any one year is limited to $16,500
for 2010. If you are age 50 or older, an additional
$5,500 in catch-up contributions is allowed.
There are no limits on income when determining if
designated Roth 401(k) contributions can be made.
However, you must have a salary from which to
make any 401(k) deferrals.
Can My Employer Make
Your employer can make matching
contributions on designated Roth
contributions. However, only your
designated Roth contributions
can be allocated to a designated Roth account.
The matching contributions made on account of
designated Roth contributions must be allocated to
a pre-tax account, just as matching contributions
on traditional pre-tax elective contributions are.
How Do I Elect to Make
Roth 401(k) Contributions?
As with traditional 401(k) plans, your plan must
specify when the elections are available. The rules
regarding frequency of elections apply in the same
manner to both pre-tax elective contributions
and designated Roth contributions and must be
specified under the plan. As an employee, you
must have an effective opportunity to make (or
change) an election to make designated Roth
contributions at least once during each plan year.
A Roth election must be in place before any money
can be placed in a designated Roth account.
The election to make designated Roth
contributions is irrevocable. Once they are
designated as Roth contributions, they cannot later
be changed to pre-tax elective contributions.
Distributions From a Roth 401(k)
The appeal of a Roth 401(k) is that qualified
distributions made from designated Roth
contributions are not included in income. This is
especially favorable if you are in a high tax bracket
at the time distributions are made.
What is a Qualified Distribution?
A qualified distribution is generally a distribution
that is made after a five-taxable-year period of
participation and that either:
• Is made on or after the date you reach age 59½;
• Is made after your death; or
• Is attributable to you being disabled.
The five-taxable-year period of participation begins
on the first day of your taxable year for which you
first had designated Roth contributions made to
your plan and ends when five consecutive taxable
years have passed.
If you make a withdrawal of a designated Roth
contribution before the end of the five-year period,
the amount of the distribution that represents
earnings will be included in your income. The
amount of the distribution that represents your
contribution remains tax-free.
Can I Take Distributions at Any Time?
The plan’s restrictions on withdrawals that apply
to pre-tax elective contributions also apply to
designated Roth contributions. So if your plan
permits distributions from your 401(k) account on
account of hardship, you may choose to receive a
hardship distribution from your designated Roth
account. This distribution will consist of a pro-rata
share of earnings and investment. The earnings
will be included in your gross income unless you
have had the designated Roth account for five
years and are either disabled or over age 59½.
Is a Roth 401(k) Right for Me?
You are required to begin minimum distributions
from your Roth 401(k) once you reach age 70½.
However, if you leave your employer, you can roll
your Roth 401(k) into a Roth IRA and avoid the
minimum distribution rules.
Careful planning is required to determine if a
Roth 401(k) is right for you. Whether sticking with
a regular 401(k) or designating some contributions
as Roth 401(k) contributions depends on how
long the money stays in the account, how much it
earns, and what your tax rates are when you put the
money in and take it out.
This brochure contains general tax information for taxpayers.
As each tax situation may be different, do not rely upon this
information as your sole source of authority. Please seek
professional advice for all tax situations.
#872 – © Copyright May 2010
National Association of Tax Professionals
PO Box 8002
Appleton, WI 54912-8002