What Is a Designated Roth Account?

A designated Roth account is a type of retirement account. It is held separately 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. Distributions from this type of account, on the other hand, are excluded from the account holder's gross income. Roth account contributions are limited and are adjusted annually for inflation.

How a Designated Roth Account Works

Designated Roth accounts are separate accounts that are held in employer-sponsored retirement plans. These include 401(k)s, 403(b)s, and 457(b) accounts. Contributions are made directly to the account rather than the main plan. As noted above, contributions are taxable but distributions are not. As per the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS), "the designated Roth plan must separately account for contributions, gains, and losses."

For designated Roth accounts, the annual contribution limit is the same as limits for 401(k) plans, which is $22,500 for 2023 (increasing to $23,000 in 2024), with a $7,500 澳洲幸运5官方开奖结果体彩网:catch-up contribution for those 50 and older in 2023 and 2024.

Employers may offer employees an opportunity to make after-tax salary deferral contributions to aღ 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 澳洲幸运5官方开奖结果体彩网:gross income. However, distributions fro꧒m the account are generally tax-free, including previously untaxed earnings in the account.

Special Considerations

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 to a pretax, traditional retirement account, and a designated Roth account during the same tax year, bu📖t the total contributions are subject to an annual contrib💟ution limit.

Employer Matching

Only employee 澳洲幸运5官方开奖结果体彩网:elective deferrals may be contributed to a designated Roth account. 澳洲幸运5官方开奖结果体彩网: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 contributio🌺ns are treated the same as pretax elective deferrals for many purposes, including th𓃲e following:

• Annual contribution limits
• Nonforfeitability and 澳洲幸运5官方开奖结果体彩网:distribution restrictions and nondiscrimination testing
• 澳洲🌄幸运5官方开奖结果体彩网:Required minimum distributions (RMDs)
• Calculations of the plan’s deduction limits

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 澳洲幸运5官方开奖结果体彩网: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 di🃏stribution to a deඣsignated 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.

The Bottom Line

Retirement planning can be a daunting task. But knowing what your options are can help make things much clearer. If you have the option, make sure you take advantage of employer-sponsored plans like a 401(k) or 403(b). You may also be able to make Roth contributions in a designated Roth account that is held in one of these plans. With a designated Roth account, you can make contributions that are included in your gross income while distributions are excluded. Just make sure that you meet the income threshold requirements and don't go over the annual limits to participate.