A designated Roth account is a separate account in a 401(k), 403(b) or governmental 457(b) plan that holds designated Roth contributions. Designated Roth contributions are elective deferrals that the participant elects to include in gross income. The plan must keep separate accounting records for all contributions, gains and losses in the designated Roth account.
A SARSEP or SIMPLE IRA plan may not offer designated Roth accounts.
Qualified distributions from a designated Roth account are excludable from gross income. Generally, a distribution qualifies for income exclusion when it occurs more than five years after the initial contribution to the account and when the participant:
- is age 59½ or older
- dies or becomes disabled
Contributing to a Designated Roth Account
Employers may offer employees an opportunity to make after-tax salary deferral contributions (known as designated Roth contributions) to a separate designated Roth account in the employer’s 401(k), 403(b) or governmental 457(b) retirement plan. Unlike other elective deferrals, the amount employees contribute to a designated Roth account is includible in their gross income. However, distributions from the account that are qualified distributions will be tax-free, even if the distribution includes previously untaxed earnings.
Benefits of designated Roth accounts
Compared to a Roth IRA, designated Roth accounts:
- Offer larger annual contribution limits than Roth IRAs,
- Are not subject to the modified gross income limitations that restrict some individuals from contributing to Roth IRAs, and
- Allow participants to keep their Roth and pre-tax savings within a single plan.
See our Roth Comparison Chart and Differences between Roth IRAs and Designated Roth Accounts for help in deciding whether to contribute to a Roth IRA, designated Roth account or pre-tax elective deferral account. Each type of account has different benefits and features.
The combined amount a participant may contribute as pre-tax elective deferrals and designated Roth contributions each taxable year is limited. Total contributions to the plan are limited to $17,500 in 2014 and $18,000 in 2015 plus an additional $5,500 in 2014 and $6,000 in 2015 for employees age 50 or older. For later years, the limits are subject to cost-of-living adjustments.
Allocating elective deferrals between Roth and pre-tax accounts
Participants may contribute to both a designated Roth account and a traditional pre-tax elective deferral account in their plan in the same year. They may allocate their contributions in any proportion they desire, as permitted under the terms of the plan. Total contributions to the pre-tax elective deferral and Roth accounts cannot exceed the annual contribution limit.
No recharacterizations are allowed
Once a participant contributes to a designated Roth account, the participant cannot later change the contributions to pre-tax deferrals (no “recharacterizations” are allowed).
In-plan rollovers to designated Roth accounts
Participants may be able to roll over an “eligible rollover distribution” to a designated Roth account from another account in the same plan.
Required minimum distributions start at age 70½
Designated Roth accounts are subject to the required minimum distribution rules that apply to 401(k), 403(b) and governmental 457(b) plans. In general, if the participant is retired or an owner, the participant must start receiving distributions from the plan at age 70½, and annual withdrawals will be required based on his or her remaining life expectancy at the time of the withdrawal. Roth IRAs, in comparison, do not require minimum distributions at age 70½.
Matching contributions and forfeitures
Matching contributions and forfeitures may not be allocated to a designated Roth account. However, employers may take into account designated Roth contributions in calculating any matching contributions under the terms of the plan. These amounts must be contributed to another account in the plan