Treasury, IRS Issue Proposed rules for Roth Contributions to 401(k) Plans

The Department of Treasury and IRS this week announced proposed regulations regarding designated Roth contributions to 401(k) plans. Roth contributions, which were created in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), will allow for employees to designate all or a portion of their 401(k) employee deferrals on an after-tax basis. Most distributions of the amount contributed as well as any earnings on those contributions will be tax-free.

Although Roth contributions are not effective until taxable years beginning after December 31, 2005, many plan sponsors are interested in amending their plans and establishing procedures for administering these accounts. Releasing these proposed rules at this time will enable Treasury and the IRS to finalize the rules in time for plan sponsors to implement this valuable retirement savings opportunity beginning in 2006.

Similar rules will apply to Roth contributions available under 403(b) plans sponsored by tax exempt organizations and public schools.

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