Roth 401(k)/403(b) Account
Q 1: What is a Roth 401(k) or 403(b) contribution? A: Prior to January 2006, participants in a 403(b) or 401(k) plan could only make traditional elective contributions with pretax dollars — not subject to income taxes when made. Taxes on the accumulation are deferred until money is withdrawn from the account, at which time the withdrawn amount is subject to income taxes. Now participants may also make a “Roth” elective contribution, which is made after income taxes are withheld. The interest and earnings withdrawn from a Roth Account are tax-free if the distribution is considered “qualified.”
Q 2: What is a “qualified” distribution? A: A qualified distribution is one that meets the following conditions: - The distribution occurs at least five years after contributions are first made to the Roth account, and
- The participant attains age 59½, dies or becomes disabled.
Q 3: What if I receive a Roth distribution before it is considered “qualified”? A: If a distribution is not “qualified,” then the earnings and interest are subject to taxation and possible early distribution penalties. However, taking a partial distribution prior to being qualified does not disqualify remaining funds in your Roth account from being “qualified” in the future.
Q 4: How much can I contribute? A: Roth contributions: - Count toward the annual dollar limit on elective contributions, meaning they are combined with all pretax contributions made to any 401(k) or 403(b) plan and cannot exceed the IRC 402(g) limit of $15,500 in 2007.
- Are also subject to the age-50 catch-up contribution limit ($5,000 in 2007) and any 403(b) special catch-up limits.
Q 5: Is there an Adjusted Gross Income (AGI) limit to be eligible to make a Roth contribution? A: No, unlike the Roth IRA, there are no AGI limits associated with Roth 403(b)/401(k) contributions. The only stipulation is that the participant must meet the eligibility requirements of the 401(k) or 403(b) plan.
Q 6: What affect does the Roth contribution have on a Roth IRA? A: None. A participant can contribute up to the maximum amounts allowed to both a Roth 401(k) or 403(b) and a Roth IRA, if eligible.
Q 7: Can my pretax 401(k) or 403(b) accounts be converted to a Roth account? A: No. While it is possible for a “traditional” IRA to be converted to a Roth IRA, no conversions are available for pretax 401(k) or 403(b) accounts to a Roth account.
Q 8: Are Roth accounts subject to Required Minimum Distribution (RMD) rules? A: Yes. Generally, all 401(k) and 403(b) accounts, including Roth accounts, are subject to the RMD rules. They are subject to begin at the later of age 70½ or separation from employment from the employer sponsoring the plan. They’re also subject to plan provisions. However, Roth accounts may be rolled over to a Roth IRA, which is not subject to the RMD rules, prior to the required beginning date.
Q 9: Can I roll my Roth account to other plan types? A: Yes. In addition to being able to roll over to a Roth IRA, Roth accounts can be rolled over to other Roth 401(k) or 403(b) accounts in plans that will accept them.
Q 10: Can I borrow against my Roth account? A: Yes. Subject to plan provisions, loans are possible from Roth accounts.
Q 11: Who might Roth accounts appeal to? A: Roth accounts might appeal to those who: - Cannot contribute to a Roth IRA due to Adjusted Gross Income limits
- Are young, might currently be in a lower tax-bracket and have a long time frame for tax-free growth
- Are financially stable but view tax hikes as inevitable and paying taxes now might help alleviate future tax burdens
- Want tax diversity and flexibility in retirement to determine whether a distribution is more advantageous as taxable or tax free
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