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Roth 401(k) Q & A

IRA Financial Group’s Solo 401(k) Plan allows participants to elect to treat contributions under the plan that would otherwise be elective deferrals as designated Roth contributions. For this purpose, an “elective deferral” is an employer contribution to a 401(k) plan that is excluded from the participant’s gross income only because the 401(k) plan is qualified or an employer contribution to a tax sheltered annuity under a salary reduction agreement to the extent excluded from gross income by 403(b) . An elective deferral is instead a designated Roth contribution if the participant “designates” it as not being excludable. A participant’s designated Roth contributions for any year may not exceed the maximum amount of elective deferrals that could be excluded from gross income, less the elective deferrals for the year that the employee does not designate as Roth contributions. A participant must include a designated Roth contribution in his or her gross income at the time he or she would have received the amount in cash absent the 401(k) election.

Are the contribution rules for a Roth 401(k) the same as a Roth IRA?

The Roth sub-account of the Solo 401K Plan is a bit of a hybrid. Although it is technically a type of 401(k) plan, it has some of the features of a Roth IRA. Only after-tax salary deferral contributions may be deposited in the Roth 401(k) sub-account. No employer contributions and no pretax employee contributions are permitted. Therefore the entire account will contain only after-tax contributions from your salary plus pretax earnings on those contributions. Because the Roth 401(k) is actually just part of a regular 401(k) plan, most of the rules that apply to a regular 401(k) plan also apply to a Roth 401(k) plan, including the contribution limits.

Can a Roth 401(k) Plan exist on its own?

No. A Roth 401(k) Plan is simply an option that can be added to a traditional 401(k) Plan. A Roth 401(k) Plan cannot exist on its own.

When are Roth 401(k) distributions taxable?

Generally, distributions from a designated Roth account are excluded from gross income if they are (1) made after the employee attains age 59 1/2 , (2) “attributable to” the employee being “disabled,” or (3) made to the employee’s beneficiary or estate after the employee’s death. However, the exclusion is denied if the distribution occurs within five years after the employee’s first designated Roth contribution to the account from which the distribution is received or, if the account contains a rollover from another designated Roth account, to the other account. Other distributions from a designated Roth account are excluded from gross income under internal Revenue Code 72 only to the extent they consist of designated Roth contributions and are taxable to the extent they consist of trust earnings credited to the account.

Can I convert a 401(k) Plan to a Roth 401(k) Plan?

Yes. The Small Business Jobs Act of 2010, signed by President Obama contained a little-known provision, which went to affect on Sept. 27, 2010, allowing for the conversion of a traditional 401(k) or 403(b) account to a Roth in the same plan if their employer offers one. However, the 401(k) Plan participant (employee) must pay income tax on the amount converted. Once the funds have been converted to the Roth 401(k) plan sub-account, as long as the plan participant is above the age of 59/1/2 and the Roth 401(k) account has been opened at least 5 years, all income and gains from the Roth 401(k) plan investment would be tax-free.

How are distributions from Roth 401(k) Plan taxed?

All distributions from Roth 401(k) plans are either qualified distributions or non-qualified distributions. If the distribution is a qualified distribution, the early distribution tax does not apply. The early distribution tax applies only to those distributions that are subject to income tax. Because all qualified distributions from Roth 401(k) Plans are tax free, they are also exempt from the early distribution tax as well.

A “qualified distribution” from a Roth IRA is excluded from gross income. To be qualified, a distribution must satisfy both of the following requirements:

  • It must not occur before the fifth taxable year following the year for which a Roth IRA contribution was first made by the taxpayer or the taxpayer’s spouse.
  • It must be made after the account owner reaches age 59 1/2 or becomes disabled, be made to the owner’s beneficiary or estate after the owner’s death, or be a “qualified special purpose distribution.”

Can I rollover the Roth 401(k) Plan to a Roth IRA?

Yes. You are permitted to toll over your Roth 401(k) plan assets into a Roth IRA. If you elect to do this, the assets can be transferred in a trustee-to-trustee transfer (also known as a direct rollover) to avoid mandatory income tax withholdings on the earnings.

Can I rollover a Roth IRA to a Roth 401(k) Plan?

No. Although you are permitted to roll over the assets of a Roth 401(k) plan to a Roth IRA, you may not do the reverse.

Am I required to take Distributions from my Roth 401(k) during my lifetime?

The required distribution rules that force you to begin taking money out of your retirement plans and Traditional IRAs during your lifetime also apply to Roth 401(k) Plans. The required distribution rules also force your beneficiaries to take distributions from the account after your death.

Please contact one of our Tax Experts at 800-472-0646 for more information.

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