The Treasury Department and the Internal Revenue Service recently issued final regulations relating to Roth 401(k) and Roth 403(b) accounts.
These final regulations provide guidance on the taxation of distributions from designated Roth accounts and other related issues. A designated Roth account is a separate account under a 401(k) plan or a 403(b) plan into which designated Roth contributions are made.
Designated Roth accounts were put in place in EGTRRA 2001, but that provision was not effective until tax years beginning after 2005. Also, because of EGTRRA’s sunset provision, many employers were reluctant to put plans with designated Roth accounts into effect. Now that the pension provisions of EGTRRA have been made permanent by the Pension Protection Act of 2006, more employers may be interested in putting designated Roth accounts into effect.
The taxation of a distribution from a designated Roth account depends on whether the distribution is a qualified distribution. A qualified distribution is not includable in an employee’s gross income. It is generally a distribution that is made after a 5-taxable-year period of participation and that:
(1) Is made on or after the date the employee reaches age 59 1/2 .
(2) Is made after the employee’s death.