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Beginning in 2006, 401(k) and 403(b) plan participants can start making after-tax or “Roth” contributions. This exciting new option is part of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001.
Here’s how it works
With a conventional plan, contributions are before tax, and taxes are paid on earnings and withdrawals. With a “Roth” plan, contributions are after tax, and earnings and withdrawals are tax free if the following conditions are met:
- Contributions remain in the plan for at least five years from the time when the first Roth contribution is made…
- Withdrawals do not begin before age 59½ (except in cases of death or disability, when the age 59½ requirement is waived).
Contribution limits
Contribution ceilings for the new Roth plans are governed by the 402(g) limit, which also applies to conventional plans. For 2006, the maximum contribution is $15,000. Participants age 50 and above can also make “catch-up” contributions of up to $5,000 in 2006. The total of any participant’s conventional and Roth contributions cannot exceed the overall 402(g) limit, plus the age 50+ catch-up limit, if applicable, in any calendar year.
Participants can make both conventional and Roth contributions in the same year. Plans can be designed to allow both conventional pre-tax and Roth after-tax contributions. However, contributions made as “conventional” or “Roth” cannot be changed later.
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