FIS Relius
The Roth 401(k) Option 7/28/2005
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As the date (January 1, 2006) approaches for adding the Roth 401(k) option, we are receiving a lot of questions regarding the requirements. Over the next several weeks, we will address some of the questions.

To which type of plans may a participant roll over his/her Roth 401(k) account?

A participant may roll over his/her Roth 401(k) account to a Roth IRA, a 401(k) plan that includes a Roth 401(k) option, or a 403(b) plan that includes a Roth 403(b) option. A participant may not roll over his/her account to a traditional IRA, governmental 457(b) plan, qualified plan that does not include a Roth 401(k) option, or a 403(b) plan that does not include a Roth 403(b) option. A participant may roll over his/her non-Roth 401(k) account to any eligible retirement plan (traditional IRA, qualified plan, 403(b) plan or governmental 457(b) plan). Accordingly, a participant with both Roth and pretax balances (such as matching contributions) who elects to roll over his/her account balance will have two separate rollover distributions.

With respect to a 401(k) plan that includes a Roth option, what is the difference between an available distribution and a qualified distribution?

A Roth 401(k) deferral (and earnings) is subject to the same distribution restrictions that apply to pre-tax deferrals. Accordingly, a plan may permit a participant to receive a distribution from his/her Roth 401(k) deferral account upon the occurrence of any of the following events: severance from employment, attainment of age 59½, death, disability, plan termination or (for deferrals but not for earnings) hardship. However, if the participant wants the distribution to be tax-free, the distribution must be a “qualified distribution.” In order to be a qualified distribution, the distribution must be on account of one of three events: attainment of age 59½, death or disability. Furthermore, a Roth 401(k) account distribution is not a qualified distribution if the distribution occurs within the 5-taxable-year period beginning on the earlier of: (1) the first taxable year for which the individual made a designated Roth contribution under the plan; or (2) in case of a Roth 401(k) plan account that includes a rollover contribution from another Roth 401(k) or 403(b) account, the first taxable year for which the individual previously made a designated Roth contribution to the rolled over account.

  • Example. Ann, age 45, terminates employment 10 years after making her first Roth 401(k) deferral. Ann receives an immediate distribution. The distribution is not qualified because she is not 59 ½.
  • Example. Assume the same facts except Ann is age 62 when she receives the distribution. The distribution is a qualified distribution.
  • Example. Assume Ann is age 60 when she receives a distribution but she made her first Roth 401(k) deferral two years earlier. The distribution is not a qualified distribution.

May a participant roll over Roth 401(k) distributions which are not qualified distributions?

Yes. A participant may roll over any distribution from his/her Roth 401(k) account as long as it is an eligible rollover distribution (e.g., not an RMD, life expectancy distribution, hardship distribution, etc.). Therefore, a participant who receives a distribution that is not a qualified distribution may nevertheless receive the benefit of tax-free treatment by rolling over the distribution and satisfying the qualified distribution requirements in the recipient plan.

A complete discussion of the Roth 401(k) rules is included in the ERISA Workshop.This program is being held in over 25 cities beginning September 21, 2005. Registration is open now.