What Is a Designated Roth Account?

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Many 401(k) plans allow taxpayers to make Roth contributions as long as the plan has a designated Roth account. Your plan may also allow you to transfer amounts to the designated Roth account in the plan or borrow money.

Check with your employer to find out if your 401(k), 403(b) or 457 governmental plan has a designated Roth account and whether it allows in-plan Roth rollovers or loans.

A designated Roth account allows you to:

  • Make designated Roth contributions to the account; and
  • if the plan permits, rollover certain amounts in your other plan accounts to the Roth account.

Pre-tax Deferrals vs. After-tax Contributions

Unlike pre-tax salary deferrals, which are not taxed when you contribute them to the plan, you have to pay taxes on any contribution you make to a designated Roth account. Any pre-tax salary deferrals and related earnings are taxable when you withdraw them from the plan.

Your gross income for the year in which you make designated Roth contributions will be higher than if you had made only pre-tax salary deferrals.

Roth contributions, however, are not taxed when you withdraw them from the plan. Earnings on Roth contributions are also not taxed when they are withdrawn from the plan if your withdrawal is a qualified distribution. A qualified distribution is a distribution that is made:

  • At least 5 years after the first contribution to your Roth account; and
  • After you are age 59 1/2 or on account of you being disabled, or to your beneficiary after your death.

Maximum Contribution Amounts

Roth IRA. In 2021, the maximum contribution to a regular Roth IRA account is $6,000 ($7,000 if age 50 or older). Furthermore, contributions are limited by tax filing status and adjusted gross income.

Designated Roth Account. In contrast, in 2021, the maximum contribution to a designated Roth account is $19,500 ($26,000 if age 50 or older), and contribution limits are not impacted by filing status or adjusted gross income.

Questions?

Depending on your particular tax situation, contributing to a designated Roth account could be a smart move. To learn more about whether you should take advantage of a designated Roth account, please call.

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