A qualified Roth 401(k) contribution program is an arrangement authorized by IRC Section 402A that allows a 401(k) participant to elect to have all, or a portion, of his annual elective plan deferrals treated as Roth contributions.
Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Roth 401(k) arrangements were available for 2006-2010 only – a very short lifespan.
However, the Pension Protection Act of 2006 gives these arrangements new life because it makes IRC Section 402A permanent after 2010, thus nullifying the sunset provision of EGTRRA.
There are several important advantages of Roth 401(k)s for wealthier clients. First, all participants are permitted to make a Roth 401(k) contribution. In contrast, an individual who files jointly and has modified adjusted gross income in excess of the $166,000 phaseout limit for 2007 cannot contribute to a Roth IRA.
Another advantage is that the limit on Roth 401(k) contributions ($15,500) by far exceeds the limit on Roth IRA contributions (up to $4,000 for 2007). Furthermore, the Roth 401(k) contribution limit for individuals age 50 or older is $20,500 for 2007.
Employer matching contributions may be made; however, they must be allocated to the participant’s 401(k) pretax account only and not to his or her Roth 401(k) account. A participant may roll over his or her distribution from a Roth 401(k) contribution account to another Roth 401(k) contribution account or to a Roth IRA.