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January 10, 2006
New Regulations on Roth 401(k) Contributions

The Treasury Department and the IRS have published final regulations with guidance for 401(k) plan sponsors who want to offer employees the opportunity to make designated Roth contributions.

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Designated Roth contributions allow for employees to designate all or a portion of their 401(k) employee deferrals as Roth contributions, which would receive treatment much like a Roth IRA contribution (that is, they would be contributed on an after tax basis, but qualified distributions of those contributions, plus earnings, would be tax-free).

The new option for a Roth 401(k) was added to the Internal Revenue Code by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and is effective for taxable years beginning after December 31, 2005.

The regulations finalize rules that were proposed on March 2, 2005.

The IRS says it will propose rules focusing on the tax treatment of distributions of designated Roth contributions in the near future.

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