Roth 401(k) Contributions

Transcription

1 Roth 401(k) Contributions Sam J. Schroeder

2 Are you ready to add Roth 401(k) to your Plan? Where did it come from, where is it going? Introducing the Roth 401(k) Separate Accounting Requirements Distributions Requirements

3 Are you ready to Add Roth 401(k) to your Plan?... cont d ADP Testing Roth 401(k) Contributions Compared to Roth IRA Contributions Are Roth 401(k) contributions right for your Plan? Reminder about 401(k) After-Tax contributions

4 Where did it come from, where is it going? Roth 401(k)'s were enacted as part of Economic Growth and Tax Relief Reconciliation Act of 2001 aka EGTRRA Roth 401(k) provisions sunset December 31, 2010

5 Introducing the Roth 401(k) Roth 401(k)'s are 401(k) contributions that are made on an after tax basis Participants can make both Traditional & Roth 401(k) contributions Traditional & Roth 401(k) contributions are aggregated for the annual limits; 402(g) limit for 2006 is $15,000 plus $5,000 catch up (indexed #s) Existing 401(k) plans must be amended to allow Roth 401(k) contributions. To date the IRS has not issued guidance on the amendment process.

6 Separate Accounting Requirements Roth 401(k) contributions must be maintained in a separate account from other money types Roth 401(k) contributions can only be rolled over into qualified plans which provide for Roth 401(k) contributions, or into a Roth IRA

7 Distributions Requirements Roth 401(k) distributions are tax free if they are Qualified Distributions, which are defined as distributions made: 1. after attainment of age 59 ½; 2. payable to a beneficiary after the death of the participant; 3. upon disability. In addition, Roth 401(k) contributions will only be considered a Qualifying Distribution after five taxable years, beginning in the year of the original Roth contribution. The original Roth contribution could have been made to the plan, or to a Roth IRA that was rolled into the plan. Tracking the five year period should be done by the plan sponsor and the participant.

8 ADP Testing Roth 401(k) contributions are included along with Traditional 401(k) contributions in the annual ADP nondiscrimination test. If the ADP test fails, a highly compensated employee with both Traditional 401(k) and Roth 401(k) contributions may elect which money type from which to receive a corrective distribution. Corrective distributions of Traditional 401(k) contributions plus earnings are includable in income. Roth 401(k) contributions would not be includable in income, though earnings on the contributions would be includable in income (if refunded by April 15).

9 Roth 401(k) Contributions Compared to Roth IRA Contributions Roth 401(k) contributions are not subject to the income limitations applicable to Roth IRAs (currently $160,000 in adjusted gross income (AGI) for married couples and $110,000 for single persons). Distributions of Roth 401(k) contributions do not qualify for first time home purchases as Roth IRAs currently do.

10 Are Roth 401(k) contributions right for your Plan? It depends on: Whether you think income tax rates will rise or fall in the future; Your perception of the present value of your tax dollars versus the potential growth of those same dollars in your retirement plan; The long term investment returns attained by the investor. Roth 401(k) contributions are beneficial if your tax bracket is higher when you take a distribution than when you make contributions

11 Reminder about 401(k) After-Tax contributions 401(k) Plans can offer employees After-Tax contributions as a plan feature. After-Tax contributions are tested under the ACP nondiscrimination test, are not aggregated with salary deferral contributions when meeting annual limits, and are not subject to the same withdrawal restrictions as Traditional 401(k) and Roth 401(k) contributions. Earnings on withdrawals of After-Tax contributions are subject to taxation.

12 Roth 401(k) Contributions Sam J. Schroeder Phone: Fax: Copyright Published by, Copyright 2005 by Administrative Retirement Services, Inc. Reproduction in whole or in part is prohibited except by written permission. All rights are reserved. Information has been obtained by Administrative Retirement Services, Inc. from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, Administrative Retirement Services, Inc. or others, does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or the result obtained from the use of such information. Readers should seek specific advice before acting with regard to the subjects mentioned here.