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A
revised set of IRS rules has established the creation of non tax deferred
qualified retirement accounts. Like the Roth IRA, contributions will be made
with after-tax dollars that allow the participant to receive tax free income
upon distribution. These accounts, called designated Roth accounts, match
the 401(k) and 403 (b) accounts that employees of business and tax-exempt
organizations currently have.
Participants of these designated Roth accounts, also known as the Roth
401(k) and Roth 403(b)’s, will be able to contribute to the accounts by
means of payroll deductions. This is the same way employees currently
contribute to their 401(k) and 403(b) accounts. One difference between the
designated Roth accounts is that the amount deducted from their paychecks
will be taxed.
There are two distinct advantages of the designated Roth accounts, compared
to the Roth IRA’s: the annual contribution limits are higher, and
employees who earn more than the phase-out limit for Roth IRA’s will still
be able to make designated Roth contributions. One notable drawback to the
designated Roth accounts is that the plan will not be universally available.
Employers will have the final decision to whether to offer them to
employees.
If an employer chooses to make designated Roth accounts available to their
employees there are some separate accounting requirements. The employer plan
must maintain designated Roth contributions in a separate account from
untaxed employee contributions. The separate accounting requirement is
required to be enforced until all Roth contributions have been distributed.
Employers may have to maintain the separate accounts for 50 years or more
with all of the attendant compliance activities and expenses.
Employees will not be able to shift contributions from a designated Roth
account to a traditional plan or vice versa after the contributions have
been made if their tax priorities changes. Employees who participate in both
types of plans but have been making contributions to only one will be able
to designate that future contributions go to the alternate account, and the
employees will be able to make both excluded and Roth contributions
simultaneously.
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