The Internal Revenue Service has published a batch of rules that could affect financial services professionals who sell Roth account plans and professionals who help run the plans.
The final regulations, Designated Roth Accounts Under Section 402A, appeared last week in the Federal Register and are based on a draft that was exposed to public comment in January 2006.
The Roth accounts in retirement plans permit workers to contribute after-tax income and later withdraw retirement income without paying any further federal income taxes.
In most cases, taxpayers must wait at least 5 years before they can begin taking tax-free distributions from the Roth accounts.
The final regulations deal with topics such as how to apply the 5-year rule for Roth account distributions, taxation of distributions that do not qualify for special tax breaks, and rollovers of Roth contributions to other retirement plans.
IRS officials say they have made several changes in the final regulations in response to public comments.
Roth account rules state, for example, that a Roth account can pay out qualified distributions after 5 taxable years, but only if the employee is 59.5 years old, dies or becomes disabled.
“In response to comments, these final regulations clarify that, in the case of distribution to an alternate payee or beneficiary, the age, death or disability of the participant are used to determine whether the distribution is qualified,” officials write in a preamble to the regulations. “The only exception is in the case of a rollover by an alternate payee or surviving spouse to a designated Roth account under a plan of his or her own employer.”
In addition, if an employee leaves to serve in the military and returns as a “reemployed veteran,” any designated Roth contributions that the reemployed veteran makes “are treated as made in the taxable year with respect to which the contributions relate,” officials write. “Reemployed veterans may identify the year for which a contribution is made for other purposes, such as for entitlement to a match, and the treatment for the 5-year period of participation rule follows that identification.”
Another major section of the final regulations deals with how to run a retirement annuity contract in light of rules that forbid employees from directly or indirectly transferring value from a non-Roth account into a designated Roth account.
“Commentators asked for additional guidance on how this requirement is satisfied for separate accounts maintained within a single annuity contract, in particular how to allocate charges for guarantees under the contract which apply to the total of all accounts under the contract,” IRS officials write.
“The IRS and Treasury Department believe that it may be difficult for a single contract to have combined guarantees that apply to both accounts without the potential for a prohibited transfer of value between the accounts, and have not issued guidance on how to account for these guarantees (including related charges),” officials write.
But the regulations authorize the internal revenue commissioner to provide guidance concerning separate accounting within an annuity contract, officials write.
“In response to comments, these final regulations clarify that, as previously indicated…a distribution of an annuity contract from a designated Roth account is not a distribution event…,” officials write. “Thus, in such case, only distributions from the annuity contract are treated as distributions for those purposes. The determination of whether a distribution is a qualified or nonqualified distribution is made at the time of the distribution from the contract.”