Designated Roth contributions are elective contributions that, unlike pre-tax elective contributions, are currently includible in gross income. If a 401(k) plan is going to provide for designated Roth contributions, it must also offer pre-tax elective contributions.

A designated Roth account is a separate account under a 401(k) or 403(b) plan to which designated Roth contributions are made, and for which separate accounting of contributions, gains, and losses is maintained.

Designated Roth contributions are treated the same as pre-tax elective contributions for most purposes, including:

• The annual individual elective contribution limit (aggregate of all designated Roth contributions and traditional, pre-tax contributions) - $15,000 in 2006 ($15,500 in 2007), with an additional $5,000 if age 50 or over, and subject to cost-of-living adjustments for future years (Code section 402(g)) (Note: 403(b) plans have special limits. See Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) for additional information),
• Determining the maximum employee and employer annual contributions - the lesser of $44,000 or 100% of compensation for 2006 ($45,000 in 2007) and subject to cost-of-living adjustments thereafter (Code section 415),
• Nondiscrimination testing,
• Required distributions (Code section 401(a)(9)), and
• Code section 404 - Elective deferrals not taken into account for purposes of deduction limits.

A qualified distribution of designated Roth contributions is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first designated Roth contribution (counting such first year as part of the 5) and is made:

• On or after attainment of age 59½,
• On account of the participant’s disability, or
• On or after the participant’s death.

If the distribution is not a qualified distribution, then the accumulated earnings will be subject to tax, and additional taxes may apply. Designated Roth accounts are subject to the same required minimum distribution rules as other accounts. Funds in Roth 401(k) accounts may be rolled over to another Roth 401(k) account or a Roth IRA, but not to any other account in a plan or to a traditional IRA.

Designated Roth contributions are permitted under Code section 402A, which was added to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16, 115 Stat. 38) (EGTRRA). Final Regulations under section 401(k) on designated Roth contributions were published on January 3, 2006, with an effective date of January 1, 2006. Proposed Regulations addressing distribution, taxation, rollover and recordkeeping of designated Roth contributions were issued on January 26, 2006. These proposed regulations generally have an effective date of January 1, 2007.

Automatic enrollment is permitted with designated Roth contributions just as with pre-tax elective contributions.

Forfeitures and matching contributions may not be allocated to a designated Roth account. Designated Roth contributions are subject to the nonforfeitability and distribution restrictions applicable to other elective contributions and may serve as the basis for a participant loan.

Comparing designated Roth contributions with Roth IRA contributions: While designated Roth contributions bear some similarity to Roth IRA contributions (Code section 408A), there are several differences between the types of contributions, including:

• Designated Roth contributions are not limited by income.
• Pre-tax elective contributions under a 401(k) or 403(b) plan may not be converted to a designated Roth account.
• Designated Roth contributions do not have the specific ordering rules for distributions that apply to Roth IRAs.

This content provided by the Internal Revenue Service: www.irs.gov