Legal Blog

The Weekly Scenario: Contributing to a Roth 401(k)

Question: Can I set up and/or contribute to my own Roth 401(k)? For plans already in place, are all distributions from the plan tax free?

 

Answer: There is no such thing as a Roth 401(k) stand-alone plan. The employer must have a 401(k) plan in place that offers a Roth component part of their employer sponsored plan. Not all employers offer such a Roth plan, but a growing number of employers do.

While Roth 401(k) plans haven’t been around too long, these Roth 401(k) plans have been in place for a long enough period of time that employees are beginning to take distributions from the plan. Distributions that are so called “qualified” will come out tax and penalty free. How is a distribution qualified?

1. The Roth 401(k) must have been in place for 5 years and;
2. The distribution must be made after age 59 1/2; or
3. The distribution is due to the death of the plan participant; or
4. The distribution is due to the disability of the plan participant.

Comment: If distributions do not meet the requirements for a qualified distribution they are made on a pro-rata basis. These distributions will consist partly of the after-tax contributions and partly of the pre-tax earnings in the Roth 401(k) account. Non-qualified distributions can generally be directly rolled over in their entirety to Roth IRAs or other Roth employer plans.

As always, if you have any questions or would like to learn more, please contact me at sshane@offitkurman.com or 301-575-0313.

ABOUT STEVE SHANE

Steve Shane Casual SmallSteve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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