401k Basics

• A 401k is a defined-contribution retirement plan. Employees contribute to a 401k account via salary deferral. Employers may also contribute to the employee 401k account by matching the employee contribution or by making a non-matching profit-sharing contribution. All taxes on gains or income earned within the 401k are deferred. As of 2011, employee contributions are limited to $16,500 annually except for those over age 50, who may contribute an additional $5,500 catch-up contribution.
  
  

Designated Roth Accounts

• A 401k plan may, but is not required to, offer designated Roth accounts as part of the plan. A designated Roth account must be a separate account from the traditional 401k plan account. Transfers are not permitted between the different 401k accounts. Employer contributions cannot be made to designated Roth accounts. The annual 401k contribution limit applies to the employee's total contributions to both types of accounts. For example, an employee may contribute $8,250 each to both the Roth and traditional account, $16,500 to one type of account, or any other division, so long as the total contribution does not exceed the annual limit.
  
  

Designated Roth Accounts vs. Traditional 401k Accounts

• Traditionally, 401k contributions are pretax dollars, which means that the amount contributed is not taxed and does not count as income for other tax calculations. When funds are withdrawn, they are considered income and taxed accordingly. With a designated Roth account, contributions are not pretax and are considered income. However, when funds are withdrawn from a designated Roth account, the funds are not considered income and are tax-free. Unlike Roth IRA accounts, designated Roth accounts in a 401k are subject to required minimum distributions.
  
  

Distributions From Roth 401k Accounts

• Qualified distributions from designated Roth 401k accounts are tax-free. To be a qualified distribution, the account owner generally must be 59 1/2 years old or older. Early distributions are subject to taxes on earnings and a 10 percent tax penalty. In addition to the age requirement, the withdrawal must occur at least five years after the first contribution to the account is made.