Starting January 1, 2006, 401(k) plan sponsors will have the option to offer their participants the ability to make Roth 401(k) salary deferral contributions. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), provides for the addition of this Roth 401(k) contribution feature in 2006. Adding a Roth 401(k) feature to your plan is somewhat like combining aspects of a Roth IRA with your traditional 401(k). Traditional 401(k) plan features remain intact, but new Roth 401(k) features and corresponding rules are added.

Aspects of the Roth 401(k):

•  Similar to a Roth IRA, employees contribute money that has already been taxed (at withholding rates), but the principal amount of the Roth 401(k) deferral contributions, as well as all earnings thereon, are generally tax-free when distributed.
•  Roth 401(k) deferral contributions may be of benefit to certain employees, including younger employees and employees who feel their retirement savings will be taxed at a higher rate than their current income.
•  Roth 401(k) deferral contributions are combined with traditional 401(k) deferral contributions in determining contribution limits, and for non-discrimination testing purposes. That is, the salary deferral contribution limits apply to the sum of both 401(k) and Roth 401(k) contributions each year.
•  Unlike a Roth IRA, which has income limitations, there are no income limitations on those wishing to make Roth 401(k) deferral contributions.
•  Employers may make a matching contribution on Roth 401(k) deferrals, however this match will be made with pre-tax dollars just as with the employer match on traditional 401(k) deferrals.
•  Roth 401(k) deferrals, as well as any gains, losses, and withdrawals, must be tracked separately from other contribution sources.
•  Roth 401(k) distributions more closely resemble traditional 401(k) distributions than Roth IRA distributions. However, like Roth IRAs, Roth 401(k) deferral contributions are subject to a “Holding Period” which is five taxable years after contributions are first made to the Roth 401(k). Distributions taken before the end of the “Holding Period” will be subject to taxation.
•  Unlike the Roth IRA, in-service distributions of Roth 401(k) contributions for the purchase of a primary residence are taxed.

To further explore the differences between Roth 401(k) savings and traditional 401(k) savings, you may wish to visit our Roth 401(k) Calculator. Also located on www.pensionspecialists.com under Client Info.

In order for your plan to offer the Roth 401(k), your plan document must be amended. In addition, the Summary Plan Description, along with any other plan materials, must be revised to reflect this change. The IRS is still finalizing regulations with respect to Roth 401(k) rules, so exact details are not yet available.

For more information on Roth 401(k) follow these links:

http://www.corbel.com
http://www.401khelpcenter.com
http://www.roth401k.com
http://www.smartmoney.com
http://www.fool.com