With the addition of the Roth component, you may now choose to have all or a portion of your 401(k) elective deferrals contributed on an after-tax basis. Roth 401(k) contributions are taxed to the participant in the year earned. They are not taxed when distributed to the participant. Moreover, the earnings are also not taxed when distributed if the distribution meets the criteria of a Qualified Distribution (see below).
Aside from the tax issues, Roth 401(k) contributions are treated much the same as pre-tax 401(k) contributions.
Both are 100% vested at all times.
Both are subject to the same annual limits.
Both are subject to an employer matching contribution if one is made.
Your Roth 401(k) account will be subject to the same distribution restrictions as your pre-tax 401(k) contributions. Generally, distributions can be made only in the following events: normal retirement, termination of employment, death, disability, or hardship. In order to be a Qualified Distribution, the participant must be at least 59½ and the distribution cannot be within five years from the calendar year in which the first Roth 401(k) contribution was made. If a participant receives a Non-Qualified Distribution, the earnings are taxable and the 10% penalty applies if the participant is under 59½.
For example, if Jane makes her first Roth 401(k) contribution in November 2006, she could receive a Qualified Distribution in January 2011 if she had had a distributable event, such as termination of employment and was at least 59½. In this case, her distribution, including the earnings would not be taxable. If, on the other hand, she terminated employment in 2010 and wanted her distribution immediately, the earnings on her Roth 401(k) contributions would be taxable to her for 2010.
Distributions (whether or not Qualified) can be rolled over without incurring any taxes or penalties, as can pre-tax 401(k) contributions. Whereas pre-tax 401(k) contributions (as well as Employer Profit Sharing and Match contributions) can be rolled over to either an IRA or another retirement plan, Roth 401(k) contributions can only be rolled over to a Roth IRA or another Roth 401(k) Plan.