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COPYRIGHT 2005 Aspen Publishers, Inc.
Senator William Roth, who died in 2003, was a relatively unassuming person (for a US Senator) who rose to become chair of the Senate Finance Committee. But unlike many other more flamboyant members of that body, Senator Roth's name will long be remembered as it is attached to a provision in the Tax Code named for him--the Roth IRA. The 2001 tax changes, commonly called EGTRRA, (1) expanded the Roth IRA to allow its use, from 2006 to 2010, in 401(k) plans. Financial advisors are touting the benefits and disadvantages of the "Roth 401(k)" contributions that will be permitted for 401(k) plans starting in 2006. Therefore, plan sponsors and administrators need to know whether to welcome this new feature into their 401(k) plans.
Background--Evolution from the Roth IRA
Starting in 2006, under new Section 402A of the Internal Revenue Code, 401(k) plans and 403(b) plans may permit participants to designate all or part of their employee contributions as after-tax "Roth" contributions. The IRS issued proposed regulations on Roth 401(k) arrangements in March; (2) final regulations are anticipated soon. A Roth 401(k) feature is not available for 457(b) plans.
After-tax contributions, sometimes called "thrift" contributions, have been part of retirement plans for a long time, and many 401(k) plans allow a choice of pre-tax or after-tax contributions even though after-tax contributions do not have the advantage of tax deferral on the contributed amount. Some participants find after-tax contributions attractive because they generally are not subject to distribution restrictions that apply to pre-tax 401(k) contributions (i.e., restrictions on distribution before age 59 1/2, severance from employment, or hardship), and their earnings, like those of pre-tax contributions, grow tax-free until distribution. Thrift contributions have been viewed by many as savings accounts.
Although it contains after-tax features, a Roth 401(k) is different. It is based on the concept of the Roth IRAs--a nondeductible, after-tax contribution in an individual retirement account....
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