Another increasingly popular retirement vehicle is the Roth IRA. Created through the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), plan sponsors could, beginning in 2006, offer plan participants the option of making after-tax salary deferral contributions to their 401(k) plan accounts. These so-called designated Roth contributions, in many respects, are treated like Roth IRAs, which means that while participant deferrals are not pre-tax, earnings accumulate income tax-free and qualified distributions are not taxed (provided certain criteria are met).
To add the designated Roth contribution feature to an existing 401(k), plan sponsors have to amend their existing plan documents. Participants who presently cannot fund a Roth IRA because their income exceeds IRS limits may cheer their employer's decision to do so because, unlike the Roth IRA, there are no income limits for contribution eligibility for 401(k) plan participants and the contribution limits are the same as for traditional 401(k) plan contributions. However, plan participants need to understand that, unlike the Roth IRA (which has no minimum distribution requirements), designated Roth contributions to 401(k) plans are subject to required minimum distribution (RMD) rules. This means that distributions of designated Roth contributions must begin after age 70 1/2. In addition, participants cannot withdraw Roth contributions until the contributions have been in the plan for at least five years and have a qualifying event such as death, disability, or retirement; otherwise a penalty may apply. That is a significant difference from the Roth IRA to keep in mind. For more information on Roth contributions, refer to Ohio National's Roth Contributions (Form 3752).
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