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Roth 401k - A Look at the Final Roth 401k Rules

Starting December 30th, 2005, the US Treasury Department issued and confirmed the Roth 401k Rules for 401k retirement plan savers. These Rules come into effect starting January 3rd, 2006 and we will look indepth at some of these Roth 401k rules.

Required Minimum Distribution Rules Confirmed

Since Regular Roth IRAs are not subject to the Minimum Required Distribution Rules (MRDs), there was a lot of opposition when the same MRDs rules were applied to Roth 401ks. The Final Roth 401k Rules have confirmed that yes, Roth 401ks are subject to the minimum required distribution (MRDs) rules.

Minimum Required 401k Distributions?

401k Minimum Required Distributions (MRDs) are established by the Internal Revenue Code to make sure that retirees actually withdraw their money upon retirement (and use it for their day to day expenses) as opposed to passing on this wealth to their heirs. As soon as you reach the age of 70.5, you must start withdrawing money starting April 1st of the following year (at 71.5) or April 1st of the year following your official retirement... (Read Full)

Roth 401k Contributions and Rollovers Only

The only type of contributions allowed to a Roth 401k include Roth 401k Deferral Contributions and certain types of rollovers from other Roth 401k and Roth 403b accounts. Therefore, rollovers from an IRA, 457 plan or other matching contributions are not permitted to be made to a Roth 401k .

Roth 401k Portability

Roth 401k Retirement assets (cash, mutual fund investments, etc) can be rolled over to other Roth 401(k)s, Roth 403(b)s, and Roth IRA(s). These rollovers can be done via Direct 401k Rollovers.

401k Distribution Rules

Non-Qualified Distributions (withdrawals made from a Roth 401k before the owner meets the expected requirements) will be taxed on a pro-rated basis meaning only the earnings made on the retirement assets will be taxed. The amount of qualified distributions, non-qualified distributions and the amount of pro-ration to be done can only be determined by your 401k plan administrator. This is advantageous to the Roth 401k owner because unlike holders of Roth IRA accounts, he does NOT have to determine the amount of qualified distributions, the amount of taxes to be paid and the pro-ration rules.

Firms Must Offer Traditional 401k to Offer Roth 401k

Your employer must offer a Traditional 401k plan in order to be eligible to offer Roth 401k Retirement Plans to his/her employees. This means the employer cannot offer Roth 401k as a sole retirement plan of his company. Furthermore, Individual Taxpayers cannot establish Roth 401k accounts, unlike the Roth IRAs that can be established by individual taxpayers. This means only employers can offer Roth 401k retirement plans to their employees.