Designated Roth Account

What Is a Designated Roth Account?

A designated Roth account is a separate account in a 401(k), 403(b), or governmental 457(b) that holds designated Roth contributions. Designated Roth contributions are elective deferrals that the participant elects to include in gross income.

Key Takeaways

  • A designated Roth account is a separate account in a 401(k), 403(b), or governmental 457(b) that holds designated Roth contributions.
  • Designated Roth contributions are elective deferrals that the participant elects to include in gross income.
  • Designated Roth account matching contributions can be made by employers, just as contributions can be made to 401(k) or 403(b) accounts.

How a Designated Roth Account Works

Designated Roth account matching contributions can be made by employers, just as contributions can be made to 401(k) or 403(b) accounts. Investors can make contributions both to a pretax, traditional retirement account, and a designated Roth account during the same tax year, but the total contributions are subject to an annual contribution limit.

For designated Roth accounts, the annual contribution limit is the same as limits for 401(k) plans, which is $19,500 for 2021 (increasing to $20,500 in 2022), with a $6,500 catch-up contribution for those 50 and older in both 2021 and 2022.

Employers may offer employees an opportunity to make after-tax salary deferral contributions to a separate designated Roth account in the employer’s 401(k), 403(b), or governmental 457(b) retirement plan.

Unlike pretax elective deferrals, the amount employees contribute to a designated Roth account is includable in gross income. However, distributions from the account are generally tax-free, including previously untaxed earnings in the account.

Special Considerations

Employer Matching

Only employee elective deferrals may be contributed to a designated Roth account. Matching contributions and profit-sharing contributions may not be made directly to the designated Roth account.

An employer may use designated Roth deferrals in calculating a matching contribution, but the match amount must be contributed to another account within the plan.

Tax Treatment

Designated Roth contributions are treated the same as pretax elective deferrals for many purposes, including the following:

Benefits of a Designated Roth Account

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. A 401(k), 403(b), or governmental 457(b) plan may permit employees to designate some or all of their plan elective deferrals as after-tax Roth contributions.

SARSEP and SIMPLE IRA plans may not offer designated Roth accounts. Once a participant contributes to a designated Roth account, the participant cannot later change the contributions to pretax deferrals, so no re-characterizations are allowed. Participants may be able to roll over an eligible rollover distribution to a designated Roth account from another account in the same plan.

Compared to a Roth IRA, designated Roth accounts offer larger annual contribution limits than Roth IRAs and 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 pretax savings within a single plan.

What Is the Contribution Limit for a Designated Roth Account?

The contribution limit for a designated Roth account is the same as that for a 401(k); $19,500 in 2021 and $20,500 in 2022. For both 2021 and 2022, there is a catch-up contribution limit of $6,500.

What Is the Difference Between a Roth IRA and a Designated Roth Account?

Larger contribution limits are allowed in a designated Roth account than are allowed in a Roth IRA ($19,500 versus $6,000 in 2021 and $20,500 versus $6,000 in 2022). In addition, a designated Roth account is not subject to the modified adjusted gross income (MAGI) limits that prevent some individuals from contributing to a Roth IRA.

Can I Have Both a 401(k) and a Roth IRA?

Yes, you can have both a 401(k) and a Roth IRA. It is a common practice. However, if your income is too high you may not be able to contribute to a Roth IRA based on the income limitations.

Article Sources

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  1. Internal Revenue Service. "Retirement Topics - Designated Roth Account." Accessed Dec. 15, 2021.

  2. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Accessed Dec. 15, 2021.

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