WHAT IS Designated Roth Account

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

BREAKING DOWN Designated Roth Account

Designated Roth account matching contributions can be made by employers, just as to 401k or 403b 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. Employers may offer employees an opportunity to make after-tax salary deferral contributions to a separate designated Roth account in the employer’s 401k, 403b or governmental 457b retirement plan. Unlike pre-tax elective deferrals, the amount employees contribute to a designated Roth account is includible in gross income. However, distributions from the account are generally tax free, including previously untaxed earnings in the account.

Benefits of 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. A 401k, 403b or governmental 457b 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 pre-tax deferrals, so no recharacterizations 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, 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.

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 of designated Roth contributions

Designated Roth contributions are treated the same as pretax elective deferrals for many purposes, including: the annual contribution limits; nonforfeitability and distribution restrictions and nondiscrimination testing; required minimum distributions; as well as calculation of the plan’s deduction limits.