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Disclaimer and Warning - From Bob Parrish CPA, P.C.

Roth IRA and 401(k) Ddesignations

The Internal Revenue Service has issued a Proposed Regulation which enumerates the rules and procedures for the designation as a Roth IRA, Roth 401(k), or Roth 403(b). You may read the regulation 26 CFR Part 1 REG-146459-05.

On January 26, the IRS and Treasury issued proposed regulations on designated Roth accounts.

These proposed regulations are generally effective January 1, 2007 and they provide guidance on the taxation of distributions from designated Roth accounts and other related issues.

A designated Roth account is a separate account under a section 401(k) plan or section 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 permitted under Code section 402A, which was added by EGTRRA. Under section 402A, effective for tax years beginning in 2006, a plan may permit an employee who makes elective contributions under a 401(k) or 403(b) plan to designate some or all of those contributions as designated Roth contributions. Designated Roth contributions are elective contributions that, unlike pre-tax elective contributions, are currently includible in gross income. However, a qualified distribution of designated Roth contributions is excludable from gross income.
Highlights of the proposed regulations include:

• Determination of 5-year Period;

• Taxation of Nonqualified Distributions;

• Rollover of Designated Roth Contributions;

• Determination of 5-Taxable-year Period after a Rollover to a Roth IRA;

• Certain Amounts not Qualified Distributions;

• Distribution of Employer Securities;

• Designated Roth Accounts under Section 403(b) Plans;

• Reporting and Recordkeeping;

• Designated Roth Contributions as Excess Deferrals; and

• Gap Period Income

The comment period for the proposed regulations ends on April 26, 2006.

See Also:

Designated Roth Accounts FAQ

Treasury Press Release

December 30, 2005
js-3068

Treasury and IRS Finalize Rules Regarding Roth 401(k) Contributions

Today, the Treasury Department and the IRS issued final regulations regarding sections 401(k) and 401(m) related to designated Roth contributions. Roth contributions were added to the Code by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and are effective for taxable years beginning after December 31, 2005. Designated Roth contributions allow for employees to designate all or a portion of their section 401(k) employee deferrals as Roth contributions, which would receive treatment much like a Roth IRA contribution (i.e., they would be contributed on an after tax basis, but qualified distributions of those contributions, plus earnings, would be tax-free).

These regulations finalize rules that were proposed on March 2, 2005. Plan sponsors desiring to offer employees the opportunity to make designated Roth contributions will find these regulations useful in designing their plans to accept such contributions. Further rules, largely focusing on the tax treatment of distributions of designated Roth contributions, will be issued in proposed form in the near future.

The text of the final regulations is attached.

Roth 401(k) Regulations (IRS Website Copy, links sometimes break)

Roth 401k Regulation FINAL 2006-01-03 (Copy on pro1040 site)

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Very truly yours,

Bob Parrish CPA Engagement Manager

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