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.
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 2020 and 2021, with a $6,5000 catch-up contribution for those 50 and older.
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 pre-tax 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.
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.
Designated Roth contributions are treated the same as pretax elective deferrals for many purposes, including the following:
- Annual contribution limits
- Nonforfeitability and distribution restrictions and nondiscrimination testing
- Required minimum distributions (RMDs)
- Calculations of the plan’s deduction limits
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 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 pre-tax 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.