J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

7.20 Designated Roth Contributions to 401(k) Plans

Employers with 401(k) plans may allow employees to irrevocably designate all or part of their pre-tax elective salary deferrals (and catch-up contributions if age 50 or older) as after-tax Roth contributions. The plan must be amended to allow Roth contributions. The Roth contributions, being after-tax, are treated as taxable wages subject to withholding.

The major incentive for employees to designate 401(k) plan contributions as Roth contributions is to obtain tax-free treatment for distributions under the qualified distribution rules applicable to Roth IRAs. That is, distributions of designated Roth contributions plus accrued earnings would be totally tax free if received after age 59½ and a five-year holding period (8.23).

Roth 401(k) contributions are available to individuals who might otherwise be unable to make annual contributions to a Roth IRA. Subject to 401(k) nondiscrimination tests, there are no income limitations on the right to make Roth 401(k) contributions, whereas contributions to a Roth IRA are barred if adjusted gross income exceeds an annual threshold (8.20).

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Law Alert

In-Plan Conversion From 401(k) to Roth 401(k)

Employers with 401(k), 403(b), or governmental 457 plans may permit employees to roll over distributions (otherwise eligible for rollover) of vested amounts to a designated Roth ...