Roth 401(k)

Beginning in 2006, 401K plans will be permitted to allow employees to designate their contributions as Roth contributions. These Roth contributions will be subject to the same rules as Roth IRAs. This means the contributions must remain in the plan for 5 years to receive the tax free advantage.

The IRS provisions of the Economic Growth and Taxation Relief Reconciliation Act made the following changes affecting 401K plans:

• Catch-up contributions were added to provide for additional elective contributions for participants age 50 and older.

• The 401K regulations are to be changed to shorten the period of time that an employee is stopped from making elective contributions under the safe harbor rules for hardship distributions.

• Distributions from 401K plans are permitted upon severance from employment rather than separation from service.

• Faster vesting is required for matching contributions.

Source: IRS.gov