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IRS Sets Out Worker Roth Rules

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Federal tax regulators have proposed regulations that could help workers avoid having to pay taxes on future retirement plan distributions.[@@]

The proposed rule, “Designated Roth Contributions To Cash Or Deferred Arrangements Under Section 401(k), would affect employers that want to let members of 401(k) plans put contributions in Roth contribution accounts set up under Section 402A of the Internal Revenue Code.

Congress included a provision letting employers adding 402A Roth accounts to 401(k) plans in the Economic Growth and Tax Relief Reconciliation Act of 2001.

Workers would have to include the income contributed to the 402A Roth accounts in their taxable income. In exchange for paying taxes today, the government says, the workers will be able to take qualified distributions of cash out of the Roth accounts when they are older without paying taxes on the distributions.

R. Lisa Mojiri-Azad and Cathy Vohs, IRS tax exempt and government entities specialists, developed the proposed regulations together with other IRS officials. The regulations and a discussion appear today in the Federal Register.

The proposed 402A program rule would require an employer to maintain workers’ Roth assets in separate accounts, maintain records of workers’ investments in the contracts, and allocate gains, losses, credits and charges separately, on a reasonable and consistent basis, according to the discussion, which was written by Mojiri-Azad and Vohs and the other IRS officials on their team.

The proposed rule also tells employers what they have to do to show that 402A Roth accounts are equitable and what employers must do if workers accidentally make excess Roth contributions.

In addition, “designated Roth contributions may be rolled over only to another plan maintaining a designated Roth contribution account or a Roth [individual retirement account],” officials write in the discussion of the proposed regulations.

The regulations would take effect for taxable years starting on or after Jan. 1, 2006.

Public comments on the proposed rule are due May 31.

The IRS has posted the proposed rule at //