“Rolling theRoth 401(k) toa Roth IRA is away of avoiding theminimumdistributionrequirement”
married couples that had a combinedincome of over $160,000 are ineligibleto contribute to a Roth IRA. However,they may contribute Roth 401(k)contributions because there are noincome limits on the 401(k) Plan.
– For 2006, the Roth IRAlimit is $4,000 ($5,000 if age 50 or over).The Roth 401(k) limit is the same as thetraditional 401(k) limit which is nearlyfour times as much. For 2006, the401(k) limit is $15,000 ($20,000 if age50 or over).
Flexibility in tax planning
–Participants will have the flexibility tosplit their contributions between atraditional 401(k) and a Roth 401(k).During years when the income tax rateis high, retired participants can withdrawfrom their Roth 401(k). When the taxrates are low, participants can withdrawfrom their traditional 401(k) account.
Avoid Required MinimumDistributions
– Since Roth IRA’s arenot subject to Required MinimumDistributions at age 70 ½, rolling theRoth 401(k) to a Roth IRA is a way of avoiding the minimum distributionrequirement.
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Employers sponsoring calendar year plans will be receiving the 2005anniversary notice data requestduring the second half of December 2005. The purpose of theanniversary notice is to collect therelevant data that we will use tocomplete the 2005 compliancetesting, contribution allocation andpreparation of Form 5500. This year we are encouraging all employers tosubmit the employee census data inelectronic format, such as aMicrosoft Excel spreadsheet. Thiswill enable us to complete thecontribution calculations andcompliance testing in a timelier manner. Details of the electronicsubmission method will be outlinedin the anniversary notice. We askthat the requested information bereturned to us as soon as possible.Please contact us if you needassistance in completing theanniversary notice.
What are the disadvantages?
– A littlemore work is involved on the recordkeeping side to make sure Roth401(k) contributions are notcommingled with any pre-taxmoney in a participant’s account.
– The payroll system mustbe able to correctly tax the Roth401(k) contributions, but not thetraditional 401(k) contributions.
5 Year Wait
– If a participant with aRoth 401(k) account takes adistribution during the initial 5 year period, the participant’s earningswill be taxed.
Get Ready for the Roth 401(k) (continued from page 1)
The Benefits Consulting Group, Inc.