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Roth 401k New Regulations

Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA) provision is included in the Roth 401k plan. This provision implemented by the IRS employees are allowed to distinguish certain 401k contributions as Roth 401k ones. This means that the contributions and gains of the employee will be tax free until retirement time of the employee comes.

This provision will be applied only in case you retain the holdings for a minimum of five years. The tax exemption of the contributions will be the same as that under a Roth IRA. Unfortunately, the validity of Roth 401k plans expires in 2010, when the plans will be subject to re-voting. If the law is not further expanded, you will be deprived of this tax benefit. As a result you will not be able to designate certain contributions as Roth contributions.

Several changes were implemented as of 2006 under the EGTRRA provision implemented by the IRS. Some of them are as follows:

  1. In order to benefit form contribution matching, quicker vesting should be implemented.
  2. Investors over the age of 50 are given the opportunity of catch-up contributions to compensate for their late start up.
  3. The provision of 401k distributions upon separation from employment was included, which eliminated the severance from service requirement.
  4. If the employee is experiencing hardship distributions, the time period during which s/he has not made elective contributions will be shortened under the new 401k rules.
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