Printer Friendly

Roth 401(k) distributions.

Proposed regulations (REG-146459-05) provide further guidance and clarification on the taxation of distributions from designated Roth accounts under Sec. 401(k) and 403(b) plans. (For a discussion of the proposed regulations on designating elective contributions to a Sec. 401(k) plan as Roth contributions, see News Notes, Laffie, "Roth 401 (k)s," TTA, March 2006, p. 133.)

Designated Roth contributions allow employees to designate all or a portion of their elective contributions under a Sec. 401(k) or 403(b) annuity plan as Roth contributions. These contributions would receive tax treatment much like Roth IRA contributions (i.e., they would be contributed from after-tax income but later, "qualifying distributions" of the contributions plus earnings would be completely tax-free).

To be a qualified Roth distribution, the amount must meet certain requirements, which include having been held for five years and having been made after the participant reaches age 59 1/2, dies or becomes disabled. Roth distributions can only be rolled over to other Roth plans or IRAs.

If a distribution is not qualified, under Sec. 72 the distribution would be included in the distributee's gross income, to the extent allocable to income on the contract, and excluded from gross income to the extent allocable to investment in the contract (basis). The amount of a distribution allocable to investment in the contract is determined by applying the ratio of the investment in the contract to the account balance to the distribution. Note: this treatment differs from the taxation of nonqualified distributions from Roth IRAs, in which nonqualified distributions are treated as a return of contributions (and thus not includible in gross income) until all contributions have been returned as basis.

Separate accounting: Under Sec. 402A(b) (2) (A) and (B), separate "designated Roth accounts" must be established, and separate recordkeeping must be maintained for each account. Under the proposed regulations, these reporting and recordkeeping requirements will not become effective until tax years beginning after 2006. This delay gives plans sufficient time to develop systems to comply with these reporting requirements.
COPYRIGHT 2006 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:Laffie, Lesli S.
Publication:The Tax Adviser
Date:May 1, 2006
Words:340
Previous Article:Treasury warning on phishing scheme using IRS logo.
Next Article:LLC valuation case is a win for the taxpayer.
Topics:


Related Articles
Inherited IRAs: planning tips for non-spouse beneficiaries of IRAs, 401(k)s.
401(k) loan setback.
The new Roth 401(k): save now and enjoy tax-free withdrawals in retirement.
Starting in 2006: Roth 401(k)s: another way to save for retirement.
New for 2006: Roth 401(k)s.
Should taxpayers invest in the new Roth 401(k)?
Roth 401(k)s.
Employee benefits news you can use: here are some of the more important developments CPAs need to make their clients and employers aware of for 2006.
To Roth or not to Roth: more choice - and individual responsibility - in retirement investing means workers need to consider their options carefully.

Terms of use | Privacy policy | Copyright © 2021 Farlex, Inc. | Feedback | For webmasters