A 5-taxable year period (sometimes called "the 5-year clock") must expire before a participant can receive a tax-free Roth distribution (a qualified distribution). The newly proposed Roth tax regulations require a Roth 401(k) plan to keep track of the 5-year clock for each Roth participant.

Many practitioners ask "How many 'clocks' must a plan track? Is there one for the whole plan, or does each participant have his or her own clock?" Each participant who makes a contribution to a designated Roth account in a 401(k) or 403(b) plan has a separate 5-year clock, based on the year the participant first makes a Roth deferral to the plan.

Assume John and Sue each participant in the same Roth 401(k) plan. John first defers to his Roth account August 1, 2006. Sue first defers to her Roth account July 15, 2007. John's 5-year clock starts January 1, 2006. He cannot receive a qualified distribution before January 1, 2011, even if he turns 59 1/2, dies, or becomes disabled in the interim. Sue's clock starts January 1, 2007, and she must wait until 2012 before receiving a qualified distribution.

The only thing that can "reset" a participant's Roth clock is a direct plan-to-plan rollover of a Roth balance. In that case, the participant's clock starts January 1 of the earlier of (1) the year the participant first made a Roth deferral to the recipient plan, or (2) the year the participant first made a Roth deferral to the distributing plan.

Special rules apply in the case of alternate payees under a QDRO and death beneficiaries. We will discuss all this and more at the upcoming 401(k) Workshops. With convenient locations throughout the country, there's sure to be one near you.