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Path to Retirement: Understanding the Benefits of Roth 401(k) Options Paying tax on plan contributions now instead of later is one of many advantages. By Jerry E. Stanford Individual Roth IRAs have been around since the Taxpayer Relief Act of 1997. Many individuals use them by paying current income taxes now and plan to reap the benefits of being able to take qualified distributions on a federal income tax-free basis in the future, generally at or during retirement. There is also another benefit to these individual Roth IRAs ��� their accounts are not subject to Required Minimum Distributions at age 70��. (This allows a greater advantage as the gains are tax-free at time of distribution.) The Pension Protection Act of 2006 introduced the Roth 401(k) deferral and rollover options to retirement plan sponsors. Additional legislation in 2010 added Roth 401(k) conversions as an option inside of 401(k) plans. Plans with assets under $10 million have been slow to add these features. However, there has been an increase in plan amendments adding these features as the multiple benefits are becoming better understood. What Exactly Are the Roth 401(K) Provisions? Following is a brief, high-level explanation of the three different Roth 401(k) options for qualified 401(k) retirement plans: 1) Roth 401(k) deferral option ��� This gives participants in a 401(k) plan an added option to make their payroll contribution on a tax-favored, after-tax basis in addition to a pretax or voluntary after-tax basis. 2) Roth 401(k) rollover option ��� This option allows participants in a 401(k) plan the ability to ���roll-in��� Roth 401(k) account balances from a previous employer. (Must have the Roth 401(k) deferral option to add this option to a new or existing 401(k) plan.) 3) Roth in-plan conversion option ��� This provision has many individual design options so it can be customized to meet the varying objectives of employers and other plan sponsors. This option allows pretax deferrals and employer contributions that have accumulated in a participant���s account to be withdrawn as an in-service distribution, converted and rolled back into the same plan as a Roth 401(k) rollover. If such pretax assets are converted, they are immediately subject to current federal income taxes in the year of the conversion. There are even options available to allow the income taxes owed on the conversion to be taken from plan assets. Qualified distributions from any of the three options listed above are received free from federal income tax (including gains) provided the participant has held a Roth account for at least five years in the same plan and has reached age 59�� when the distribution is made. If the retirement plan assets are rolled to an individual Roth rollover account, then the five-year clock starts from that participant���s first year of having any Roth IRA contributions. (Distributions made prior to age 59�� are subject to an excise tax penalty unless rolled over into an individual IRA or employer-sponsored qualified retirement plan.) Unlike its cousin the Roth IRA, the Roth 401(k) feature can be utilized regardless of a participant���s income and allows higher maximum contribution limits. What Motivates Plan Participants and Business Owners to Use the Roth 401(K) Options? Here are some frequently mentioned benefits by 64 | www.cedmag.com | Construction Equipment Distribution | January 2013 64_Roth_401k_Feature_KP.indd 64 12/21/12 3:30 PM