Roth 401(k) Law
The Roth 401(k) is a type of retirement savings plan. It represents a
unique combination of features of the Roth IRA and a traditional 401(k)
plan. As of January 1, 2006, U.S. employers have been free to amend
their 401(k) plan document to allow employees to elect Roth IRA type tax
treatment for a portion or all of their retirement plan contributions.
For 2010, salary contributions to a Roth 401(k) are limited to $16,500
for employees age 49 and under, and $22,000 for employees age 50 or
over. There are, however, some different laws that govern the Roth
401(k) regarding contributions and withdrawals.
The Roth 401(k) combines some of the most advantageous aspects of both
the 401(k) and the Roth IRA. Under the Roth 401(k), employees can decide
to contribute funds on a post-tax elective deferral basis, in addition
to – or instead of – pre-tax elective deferrals under their traditional
401(k) plans.
In general, the Roth 401(k) law makes the difference between a Roth
401(k) and a traditional 401(k) primarily relating to pre- or post-tax
contributions. The Roth 401(k) is funded with after-tax dollars, while
the traditional 401(k) is funded with pre-tax dollars. After-tax dollars
represent money for which taxes are paid in the current year, and
pre-tax dollars are those which do not represent federal taxable income
in the current year.
With regard to Roth 401(k) laws on earnings, the earnings on Roth 401(k)
contributions will be tax free, as long as the distribution is made at
least five years after the first Roth 401(k) contributions, and the
attainment of age 59 and ½ unless an exception applies.
Additional Roth 401(k) law states that contributions are irrevocable.
So, once an employee’s money is invested into a Roth 401(k), it cannot
be moved into a regular 401(k) account. Employees are, however, allowed
to roll their Roth 401(k) contributions over to a Roth IRA account upon
their termination of employment.
