 |
New Roth rules can help with retirement savingsNew Roth rules can help with retirement savings Martin James | CPA, PFS | mjames@mjamescpa.com Sunday October 9, 2005 advertisement Beginning on Jan. 1 your employer may establish a 401(k) plan that includes a designated Roth contribution program, as a result you may be able to avoid tax on a significant portion of your retirement earnings. As you may know, Roth IRAs have become a popular way to prepare for retirement. There’s no deduction up front, but Roth IRAs allow you to withdraw tax-free funds you have contributed toward retirement — plus the earnings on those funds. The amount that may be contributed each year to a Roth IRA is limited to the maximum that may be contributed to an IRA — $4,000 in 2006 and 2007 ($5,000 for individuals who will have reached age 50 during the year). Also, taxpayers with income over certain thresholds ($110,000 for single individuals, $160,000 for married individuals) are not permitted to contribute to a Roth IRA. Beginning in 2006, 401(k) plans and 403(b) annuity plans can include a qualified Roth contribution program, a feature that allows participants at all income levels to make after-tax, Roth-type contributions of some or all of the elective deferrals that they otherwise can make under these plans. A 401(k) plan or 403(b) annuity plan that adopts a designated Roth contribution program must establish a separate designated Roth account” for each employee’s “designated Roth contributions, and maintain separate record keeping for each account. Qualified distributions from a designated Roth account are tax-free. Also, distributions from a designated Roth account are not aggregated with other distributions from the plan or annuity for purposes of determining the taxable portion of each payment. Thus, qualified distributions from designated Roth accounts avoid tax on Roth IRA earnings forever, because earnings may be distributed tax-free. A qualified distribution may be made when a participant: (a) reaches age 59 1/2, (b) is disabled, or (c) dies. However, a distribution is not a qualified distribution if it is made within the five-year period beginning with the first year in which the participant makes a designated Roth contribution. Designated Roth contributions are treated as any other 401(k) plan elective deferral or 403(b) annuity plan salary reduction contribution (except, of course, that Roth contributions are includible in income). Thus, under 401(k) plans, designated Roth contributions are treated as elective deferrals under the 401(k)(3) nondiscrimination test. Similarly, because designated Roth contributions are treated as elective deferrals, they are subject to the annual limit ($15,000 for 2006; $20,000 for individuals who will have reached age 50 during the year). This limit applies to the sum of the designated Roth contributions and the amount of elective deferrals that are not designated Roth contributions. Contributions in excess of the limit on elective deferrals that are attributed to designated Roth contributions may be subject to tax upon distribution (even though contributions were made after-tax)-unless the excess contributions are distributed in a timely manner. Similarly, contributions in excess of the limit based on the nondiscrimination rules may be subject to a 10 percent excise tax, if not timely corrected. Designated Roth accounts are subject to the required minimum distribution requirements for taxpayers who reach age 70. But, because a participant may roll over amounts in his designated Roth account to a Roth IRA (which is not subject to the lifetime required minimum distribution requirements), it may be possible to arrange to keep designated Roth contributions, plus earnings, in a Roth-type account throughout your retirement. Designated Roth contributions are a valuable retirement planning mechanism and should be considered in your retirement planning. James is a Certified Public Accountant with an office in Mooresville. He can be reached by e-mail at mjames@mjamescpa.com or by phone at (317) 834-2276. Homepage Other open community sites http://www.business-business.biz http://www.investment-investment.us Please support are sponsors. To design you custom retirement plan. http://www.retirement-plan.us For planning a IRA rollovers. http://www.ira-rollover.us Professional asset allocation and the wonders it can do. http://www.asset-allocation.us Managers selected to fit your needs. http://www.money-managers.us |
|
Post new CommentThis site does not allow anonymous comments. Registered members can login to participate. Registration is free and takes only a few seconds |
|