Roth 401(k) Frequently Asked Questions

What is the difference between a Roth 401(k) deferral versus a “traditional” 401(k) pre-tax deferral?  With a Roth 401(k) deferral, plan participants can choose to have their salary deferrals made on an after-tax basis. Unlike pre-tax deferrals, Roth 401(k) deferrals will be subject to current federal and, if applicable, state and local income taxes. In other words, Roth 401(k) contributions are subject to tax withholding like regular pay.

Also, the earnings on the Roth deferrals will be tax-free if the contributions remain in the plan for at least five years after Roth deferrals commence and the participant does not take withdrawals before attaining age 59½ (death and disability also qualify). A traditional 401(k) deferral is tax deferred at the time of contribution and both the deferral and the earnings on the deferral are taxable when distributed.

How much can a participant contribute to a Roth 401(k)?  The 402(g) limit applies to both Roth 401(k) and traditional pre-tax deferrals. The tax law limit for 2007 is $15,500 for all salary deferrals, whether they are Roth or pretax. For participants 50 or older an additional catch-up contribution of up to $5,000 can be made. Again, the catch-up can be in Roth, pretax, or a combination thereof.

Can a participant contribute $15,000 (plus up to $5,000 in catch-up contributions for participants 50 or older) to the pre-tax option and the same amount to the Roth?  No. The $15,500/$5,000 limits apply to the total of all contributions to any and all 401(k) plan(s).

May the participant make both pre-tax deferrals and Roth 401k deferrals in the same year?  Yes. Roth is not an “all-or-nothing” feature.

Can Roth 401(k) contributions be matched, like pretax deferrals?  Yes. However, the match contributions are tax deferred until distribution, at which time they will be taxed as ordinary income, like the match made on pretax deferrals.

When must the participant elect to make a Roth deferral?  The decision must be made prior to contribution is deducted from the participant’s paycheck. The decision is irrevocable. Pre-tax contributions cannot be re-characterized as Roth, or vice versa.

 What is the impact of a Roth 401(k) contribution on a participant’s net pay? If a participant chooses to contribute to the Roth option instead of the pre-tax option, and he wants the same net take home pay as the pre-tax option, the Roth contribution is lower than the pre-tax contribution because he pays tax on his salary reduction before it is deposited to the Roth account.  If a participant wishes to have the same dollar amount deposited to the plan when compared to a pre-tax contribution, then his salary reduction is higher and net take home pay is lower when compared to the pre-tax option. Same Roth contribution means higher salary reduction. 

May an individual have both a Roth IRA and participate in Roth 401(k) plan? Yes, assuming the participant is not precluded from contributing based on adjusted gross income.

Can a participant roll over his Roth IRA into my Roth 401(k) account?  No. At this time, the law does not permit rollovers of Roth IRAs into Roth 401(k) accounts.

What happens if the Roth funds are withdrawn prior to five years and age 59½? The portion of the distribution that represents the amount of the Roth contributions is tax-free; any earnings are taxable and may be subject to a premature distribution penalty.

Is the Roth account available for loans, hardship withdrawals, or in-service 59½ withdrawals?  Yes, the proposed regulations do permit this. However, additional guidance is needed from the IRS. Additionally, we are reviewing the administrative impact of making Roth available for loans, hardships, and in-service 59 ½ withdrawals.

Are minimum distributions required from a Roth 401(k) account?  Yes. However, a participant can roll over the Roth 401(k) account into a Roth IRA. The required minimum distribution rules do not apply to Roth IRAs.

What is a “qualified distribution”? A distribution is qualified and therefore tax-free if it occurs after the 5-yeartaxable period during which your contribution is first deposited to the Roth 401(k) account, and the distribution is attributable to your: 1) attainment of age 59½, 2) disability, or 3) death. In determining the 5-year-taxable period, any deferral contributed within calendar year 2006, even if the first contribution date is December 31, 2006, is considered contributed on January 1, 2006.

Does each Roth 401(k) contribution start a new five-year period?  No, a Roth contribution in a subsequent year does not start a new five year period.