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Proposed Roth 401K Rules

Roth-style contributions can be made to a 401(k)/403(b) plan by all participants, regardless of their income level. Higher income taxpayers are prohibited from making contributions to Roth IRAs, but not Roth 401(k)s.

According to the IRS, it will implement the Roth 401K provision of EGTRRA. Under this new ruling, employees will be able to designate money in their 401K plan to be Roth contributions. This will allow employees to contribute money that has been taxed into a Roth where contributions and earnings will grow tax free until the participant retires.

Beginning in 2006, 401K plans will be permitted to allow employees to designate their contributions as Roth contributions. These Roth contributions will be subject to the same rules as Roth IRAs. This means the contributions must remain in the plan for 5 years to receive the tax free advantage. Under the current law, the Roth provision will sunset at the end of 2010. This means plan participants can never enjoy the Roth benefits unless Congress extends the law.

According to Richard G. Schwartz and Randell Montellaro of Epstein Becker & Green, P.C., Roth IRAs were first introduced in the late 1990s. Roth IRAs have provided a vehicle for certain taxpayers to make after-tax contributions to an IRA and not be taxed on the accumulated earnings upon distribution. Roth IRAs, however, have their limitations. The benefits of making Roth-style contributions to a 401(k)/403(b) plan, as opposed to making contributions to a Roth IRA, are two-fold.

The annual contribution limit is higher under a 401(k)/403(b) plan than under an IRA: $15,000 ($20,000 if age 50 or older) for a 401(k)/403(b) plan versus $4,000 ($5,000 if age 50 or older) for an IRA; and
Roth-style contributions can be made to a 401(k)/403(b) plan by all participants, regardless of their income level. Higher income taxpayers are prohibited from making contributions to Roth IRAs, but not Roth 401(k)s.

For more detailed information on Schwatz's and Montellaro's article regarding Roth 401(k)/403(b) plans visit the white paper section of our website.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Tuesday, August 26, 2008 11:08 PM