Brocker.Org: ROTH 401(k)’s… A Wolf in Sheep’s Clothing


Roth 401 (k) Overview:

On January 1, 2006, staff members can pick to make their 401(k) contributions on both a pre-tax or an soon after-tax basis or a combination of the two. The contribution limits which use to these 401(k) contributions built in 2006 (whether built pre-tax or soon after-tax or both of those) are:

1.$fifteen,000 less than the simple limit, as well as,

2.$five,000 moreover for staff members who are age fifty or older.

oThe employer remains accountable for withholding federal money tax (and point out and nearby money tax, wherever relevant) and any relevant payroll taxes on the soon after-tax part of just about every employee’s 401(k) contribution.

*Whilst no federal (or point out or nearby, wherever relevant) money tax is withheld from pre-tax contributions, payroll taxes will use to the quantities withheld as pre-tax contributions.

oAbsent added IRS guidance, both of those the pre-tax and the soon after-tax contributions will be claimed on just about every employee’s W-2 just as is completed now. We hope that the IRS will (before issuance of Sort W-2 for the 2006 tax year) deliver a new code to use on Sort W-2 for the soon after-tax part of the contributions.

oA individual recordkeeping account ought to be set up for just about every participant who wishes to make Roth 401 (k) contributions.

Procedures of the Roth 401(k)

To assist with your choice, it is crucial to recognize the policies of the Roth 401(k):

o Roth 401(k) accounts are essential to be individual accounts – the soon after-tax contributions can’t be put together with pre-tax contributions.

o Distributions from the Roth 401(k) will be tax no cost for federal money tax uses offered that both of those a five-year keeping interval and a qualifying function prerequisite are fulfilled:

a)The five-year keeping interval starts with the 1st contribution to any Roth 401(k) account in the employer’s strategy.

b)Qualifying gatherings are constrained strictly to attainment of age 59 1/2, death, or incapacity.

Rollovers to a Roth 401(k) may possibly be built from other employer sponsored Roth accounts. If rolled over to a Roth 401(k), the five-year keeping interval starts with the previously of the date the rolled over account was set up, or the date the obtaining Roth account was set up.

Our Reservations

The subsequent is a summary of our reservations. Make sure you call our office for even further discussion in increased depth.

A. The IRS ought to concern guidance clearing up that the perseverance of the five-taxable-year keeping interval is dependent on a calendar year rather than the strategy year.

B. Requiring that the strategy administrator of the obtaining strategy to be accountable for monitoring eligible rollovers of Roth contributions into a 401(k) strategy and the time at which a Roth contribution was 1st built would be a deterrent to accepting rollovers of Roth contributions and would properly limit the transfer of these quantities. Contributors ought to be accountable for monitoring both of those the basis in the rollover account and the time at which a Roth contribution was 1st built.

C. Sponsors of strategies that permit for Roth contributions ought to also have the capacity to consist of strategy provisions that established out policies with regard to the purchase of account sources for all types of strategy distributions.

D. The IRS ought to concern sample or superior-religion amendments that strategy sponsors may possibly use with no impacting reliance on prior perseverance letters, notification letters or feeling letters as to the qualification of the phrases of their strategies.

E. Sponsors of 401(k) strategies that permit for Roth(k) contributions and who want to put into action an automatic enrollment element ought to be equipped to pick whether pre-tax or Roth(k) elective contributions will be the default election for individuals.

F. Sponsors of 401(k) strategies that permit for Roth(k) contribution applications ought to be authorized to impose constraints on the capacity and frequency of strategy individuals to pick amongst Roth(k) and pre-tax elective contributions in a supplied calendar year with no violating IRS policies.

G. A new product Distribution Notice to get into account distributions of both of those pre-tax and specified Roth elective contributions will be essential. The current product is by now 6 webpages in size.

H. A strategy sponsor ought to be equipped to keep a strategy that only permit for Roth contributions and no pre-tax income deferrals.

Final Note

Once again, we advocate that Employers and Sponsors of 401(k) Strategies that are looking at adopting the Roth provisions severely think about the reservations noted above. Maybe it may possibly be greatest to permit other folks to race in advance and see how they fare.