The Internal Revenue Service has released final regulations that will shape the new employer-sponsored Roth retirement account programs.
An employee at a company that adopts a Roth account program can pay federal income taxes on some or all of the income contributed to the employer’s retirement savings plan. In exchange, the federal government has promised not to tax Roth account retirement benefits payments and other distributions that qualify for special tax treatment.
Congress included Section 402A of the Internal Revenue Code, the law that is creating the employer-sponsored Roth account program, in the Economic Growth and Tax Relief Reconciliation Act of 2001.
The new final regulations, which take effect Jan. 3, 2006, and apply to plan years beginning on or after Jan. 1, 2006, are based on a draft that the IRS issued in March.
Although “designated Roth contributions” to an employer-sponsored retirement program are similar to Roth individual accounts, there are many differences between individual Roth accounts and employer-sponsored Roth accounts, according to a preamble to the new regulations written by 2 IRS officials, R. Lisa Mojiri-Azad and Cathy A. Vohs.
The Roth IRA rules let individuals convert traditional IRAs into Roth IRAs, but Section 402A does not let employees convert traditional employer-sponsored retirement accounts into Roth accounts, Mojiri-Azad and Vohs write.
Conversely, federal law imposes income eligibility limits on taxpayers who want to contribute to Roth IRAs but imposes no such limits on employees who want to contribute to employer-sponsored Roth accounts, Mojiri-Azad and Vohs write.