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Don't Forget About Roth 401(k)


The Roth 401(k) became a new retirement savings option at the beginning of 2006, a provision resulting from the Economic Growth and Tax Relief Reconciliation Act of 2001.  A 401(k) plan may now allow employees to designate some or all of their elective contributions as Roth contributions.  Unlike regular 401(k) contributions, which are excluded from the employee's taxable income, any amount designated as a Roth contribution would be included as taxable income to the employee.  Any qualified distribution from designated Roth contributions, and the related earnings thereon, is completely free from federal tax.  Also, unlike regular Roth IRA contributions, Roth 401(k) contributions are allowable regardless of one’s income level.  For many taxpayers, this could be the only way that they could participate in a Roth account.

In order for this to occur, the administrator of the 401(k) plan will have to perform the additional accounting.  The Roth 401(k), and the associated earnings, will have to be maintained in an account separate from the regular 401(k) monies.  Additionally, the administrator will be required to separately allocate, on a reasonable and consistent basis, gains and losses between the designated Roth contribution account and other accounts under the plan.  Because of this increased accounting requirement, it is virtually assured that fees to administer these types of plans will increase.

One of the drawbacks to the Roth 401(k) plan is that no employer matching contributions or plan forfeitures can be allocated to the Roth contribution account.  As a result, only the employee's post-tax contributions and the related earnings will be able to accumulate in the Roth 401(k) account.  If you should have any questions about Roth 401(k) plans, please contact Diane Pearson or Jim Holtzman.


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