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The Roth 401K – How to Designate a Roth 401K Account

In general, most Solo 401K Plans include a feature that allows one to include a designate Roth account. A designated Roth account is a separate account in a 401(k) that holds designated Roth contributions. Designated Roth contributions are elective deferrals that the participant elects to include in gross income. The plan must keep separate accounting records for all contributions, gains and losses in the designated Roth account.

The combined amount a participant may contribute as pre-tax (Roth) elective deferrals and designated Roth contributions each taxable year is limited. Total contributions to the plan are limited to $16,500 plus an additional $5,500 for employees age 50 or older (catch-up Roth contribution). These are the limits for 2010 and 2011; for later years, the limits are subject to cost-of-living adjustments. The employee deferral can be in pre-tax or in after tax (Roth). The advantages of electing to make a Roth 401K contribution is that if certain requirements are met, an individual will be able to take as a distribution the income and gains generated by the Roth 401K investment tax-free. Qualified distributions from a designated Roth account are excludable from gross income. Generally, a distribution qualifies for income exclusion if it occurs more than five years after the initial contribution to the account and is made after the participant reaches age 59½, dies or becomes disabled.

Alternatively, a Roth 401K distribution that is not a qualified distribution will be partially included in gross income if there are earnings in the account. In such a case, the distribution will be treated as coming pro-rata from earnings and contributions (basis). In addition, the 10% tax on early withdrawals may apply to the part of the distribution that is includible in gross income.

A Solo 401K Plan participant may contribute to both a designated Roth account and a traditional pre-tax elective deferral account in their plan in the same year. The Solo 401K Plan participant may allocate their contributions in any proportion they desire, as permitted under the terms of the plan. Total contributions to the pre-tax elective deferral and Roth accounts cannot exceed the annual contribution limit.

To learn more about the benefits of using a Roth 401K, please contact a 401K Expert at 800-472-0646 or visit

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Posted in Solo 401(k)

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