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roth 401 k

Roth 401(k) Rules

If your employer has a 401(k) plan available for you to participate in, you may also have a Roth 401(k) option available as a part of the plan. (We’re referring to 401(k) plans by name here, but unless noted the rules we’re discussing also apply to other Qualified Retirement Plans (QRPs) such as 403(b) or 457 plans.)  Roth 401(k) plans are not required when a 401(k) plan is offered, but many employers offer this option these days. The Roth 401(k) option, also known as a Designated Roth Account or DRAC, first became available with the passage of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, with the first accounts available effective January 1, 2006.  The Roth 401(k) was designed to provide similar features present in a Roth IRA to the employer-provided 401(k)-type plans. Similar to traditional 401(k) Certain features of the Roth 401(k) are similar to the traditional […]

Roth 401(k) Conversions Explained

Earlier in 2013, with the passage of ATRA (American Taxpayer Relief Act) there was a provision to loosen the rules for 401(k) plan participants to convert monies in those “regular” 401(k) accounts to the Roth 401(k) component of the account.  Prior to this, there were restrictions on the source of the funds that could be converted, among other restrictions.  These looser restrictions apply to 401(k), 403(b) and 457 plans, as well as the federal government Thrift Savings Plan (TSP). Recently, the IRS announced that guidance was available to utilize the new conversion options.  As long as the 401(k) plan is amended to allow the conversions, all vested sources of funds can be converted, even if the participant is not otherwise eligible to make a distribution from the account. This means that employee salary deferrals, employer matching funds, and non-elective payins to the 401(k) account can be converted to a Roth […]

Pros and Cons of the Roth 401(k)

The Roth 401(k) first became available in January 2006, is an option available for employers to provide as a part of “normal” 401(k) plans, either existing or new.  The Roth provision allows the employee to choose to direct all or part of his or her salary deferrals into the 401(k) plan to a separate account, called a Designated Roth Account, or DRAC. The DRAC account is segregated from the regular 401(k) account, because of the way the funds are treated.  When you direct a portion of your salary into a DRAC, you pay tax on the deferred salary just the same as if you had received it in cash.  This deferred salary is subject to ordinary income tax, Medicare withholding, and Social Security withholding if applicable. The unique thing about your DRAC funds is that, upon withdrawal for a qualified purpose (e.g., after you have reached age 59½, among other […]

The Roth 401(k) Plan

Many hard working Americans have access to a defined contribution retirement plan called a 401(k). Essentially, a 401(k) is a retirement savings vehicle provided by employers to their employees as a means for the employee to save for retirement, often with the employer providing a “match” of the employee’s contributions up to a certain percentage. As of January of 2006 (a result of EGTRRA 2001), employers can now offer employees the Roth 401(k) as part of their 401(k) plan. Before we get into the advantages of the Roth 401(k), let’s briefly look at how the regular 401(k) works. Employees that have access to a 401(k) are generally allowed to contribute up to $17,000 (2012 figures, indexed annually) per year to their 401(k). Employees aged 50 and over are allowed an additional $5,500 (again, 2012 figures, indexed annually). Employee salary deferrals are taken from the employee’s earnings on a pre-tax basis […]

What types of accounts can I rollover into?

OMG IRA (Photo credit: girlonaglide) When you have money in several accounts and you’d like to have that money consolidated in one place, the question comes up – Which type of account can be tax-free rolled over into which other type of accounts? Thankfully, the IRS has provided a simple matrix to help with this question. At this link you’ll find the matrix, sourced from IRS Publication 590. In terms of explanation, here are a few rules to remember: You can generally rollover one account of any variety (IRA, Roth IRA, 401(k), and so on) into another account of the exact same type. You can rollover a Traditional IRA into just about any other tax-deferral plan, including 401(k), 403(b), 457(b), as well as a SEP IRA.  The same goes for each of the accounts in reverse as well as between all of these types of accounts.  In general, employer plans […]