Q&A with Natalie Choate: Roth IRAs and New Roth 401(k)s

[roth401k]

Q&A with Natalie Choate: Roth IRAs and New Roth 401(k)s

Natalie Choate's book Life and Death Planning for Retirement Benefits (Ataxplan Publications, 5th ed. 2003) is "the bible on IRA distribution planning...a must for all advisors who wish to be seriously considered IRA experts" says Ed Slott, CPA, in his new book Parlay Your IRA into a Family Fortune (Viking, 2005). To order Life and Death Planning for Retirement Benefits, or to learn more about the book and why it has sold over 32,000 copies, visit www.ataxplan.com.


Q. Regarding the new "designated Roth accounts" (DRACs) that are coming on stream in 2006, will these also be allowed for 403(b), 457, or "solo" 401(k) plans?

Natalie: The DRAC is permitted for any qualified plan or 403(b) plan that permits elective deferrals, so "solo" (self-employed) 401(k) plans can have DRACs, but it appears that 457 plans cannot. § 402A(e).

Q. What is the 2006 dollar limit for contributions to the DRAC?

Natalie: The 2006 dollar limit for elective deferrals is $15,000, plus an additional $5,000 for those who have reached age 50 by the end of the year. (Contributions may be limited by other factors such as top-heavy rules.) The participant can elect to have his maximum deferral amount contributed to his traditional 401(k) (or 403(b)) account, or to his DRAC, or partly to each.

Q. Can existing 401(k) accounts be converted to Roth accounts?.................

ENTIRE ARTICLE HERE


Natalie: The Code section creating DRACs (§ 402A) is very sparse, and the IRS has not yet issued any regulations on DRACs. Thus, for now, it appears that DRACs are subject to the same rules as any other 401(k) account, including the restrictions against loans and early distributions, and the minimum distribution requirements beginning at age 70½ (or upon later retirement, in some cases). The requirement of taking MRDs beginning at age 70½ can be avoided by rolling the DRAC over to a Roth IRA once the employee is permitted to do that. Roth IRAs are not subject to the lifetime MRD rules.