Qualified Roth IRA Contribution Program
The qualified Roth IRA contribution program is a retirement plan option that some employers offer to their employees.
Internal Revenue Code Section 402A allows employers to create a type of elective deferral program, referred to as a “Qualified Roth Contribution Program,” “Designated Roth Account,” “Roth 401(k)” or “Roth 403(b).” Under these plans, participants contributing to a 401(k) plan, or a 403(b) (tax-sheltered annuity) program may irrevocably designate a portion of their contributions as Roth contributions.
The employee’s contributions to the Roth 401(k) or Roth 403(b) are on an after-tax basis, but at retirement the earnings and pay-outs of the employee’s contributions are tax-free. In many respects, the decision whether to designate a portion of elective deferrals as Roth contributions is similar to the decision of whether to make a regular deductible contribution to an IRA or a non-deductible contribution to a Roth IRA, although more individuals will be in a position to make the decision.
-
Available only if the employer’s plan offers the Qualified Roth option.
-
Can designate part or all of the contribution to the Qualified Roth option.
-
The election once made is irrevocable.
-
Not subject to the regular Roth AGI contribution limits.
-
Designated Qualified Roth amount cannot exceed the annual limit for elective deferral contributions, $23,000 ($30,500 if age 50 or over) for 2024 ($22,500 ($30,000 if age 50 or over) for 2023; $20,500 ($27,000 if age 50 or over) for 2022; $19,500 ($26,000 if age 50 or over) for 2020 and 2021.
-
Prior to 2024, subject to the required minimum distribution (RMD) rules at age 72 (70½ before 2020)., However, the RMD could have been avoided if the Qualified Roth had been rolled into a Roth IRA before reaching age 72 (70½ before 2020).
-
After December 31, 2023, SECURE 2.0 Act Section 325 eliminates the pre-death distribution requirement for Roth accounts in employer plans. Section 325 does not apply to distributions which are required with respect to years beginning before January 1, 2024, but are permitted to be paid on or after such date.
-
5-year qualifying period determined separately from a Roth IRA.
-
Qualified distributions are tax-free.
-
Employer’s matching contributions prior to December 29, 2022 could not be designated as to the Qualified Roth and will be taxed when distributed.
-
Rollover to a Roth IRA is permitted.,
-
The employer (plan sponsor) must maintain separate Roth accounts and keep separate records for each Roth account from the time the initial designated Roth contribution is made.
-
Distributions from Roth 401(k) and Roth 403(b) accounts may be rolled over, but only to other Roth accounts in a 401(k) plan or 403(b) arrangement, or to a Roth IRA.
-
Under the general rules of elective deferrals, distributions from Roth 401(k) accounts are permitted only when the participant terminates employment, dies, becomes disabled, reaches age 59½, or due to hardship (if allowed by the plan).
Excess Deferrals
In general, when a 401(k) or 403(b) plan participant has excess deferrals (i.e., more than the annual limit is contributed), the excess must be distributed and included in income. However, if Roth 401(k)/403(b) contributions are distributed as excess deferrals no later than April 15 of the year following the contribution year, they will not be subject to tax (because they were after-tax contributions), but the earnings on the excess Roth 401(k) or 403(b) contributions will be taxed when distributed.
If the plan doesn’t distribute the excess Roth 401(k)/403(b) contributions by April 15, the Roth 401(k)/403(b) contributions will be taxed twice. The first time was when the contribution was made. The second time will be upon distribution, at which time the earnings on the excess contributions will also be taxed.
Taxation of Distributions
Like Roth IRA contributions, Roth 401(k)/403(b) contributions and related earnings are generally not included in gross income when distributed, if they are “qualified distributions,” meaning the distribution was made:
-
After the participant reached age 59-1/2, died or became disabled, AND
-
More than 5 years after the first Roth 401(k) or Roth 403(b) contribution to the plan or a predecessor Roth 401(k)/403(b) plan.
Retirement Funds Can Be Converted to a Designated Roth Account
A participant in a 401(k), 403(b) or 457 retirement plan that also includes a Designated Roth account may, in a qualified distribution, roll over the portion of the plan that is not in a Designated Roth account into the Designated Roth account. The IRS terms this action an “in plan rollover.” The rollover does not count towards the maximum limit on elective deferrals for the year.
The rollover, if elected by the employee (or surviving spouse), is made by direct transfer within the plan. Rollovers from other plans are not permitted. Once the rollover is made, future distributions from the designated Roth account conform to the rules for Designated (Qualified) Roth Accounts discussed above.
Caution
A plan that includes a Designated Roth program is permitted, but not required, to allow rollover contributions (described above) to a designated Roth account. (Com Rept)
Plans have allowed participants to convert their pre-tax accounts to Roth accounts, but only with respect to money they have a right to take out of the plan, usually because they have reached age 59½ or separated from service. The American Taxpayer Relief Act (ATRA) allows any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable.
This is, however, not a tax-free rollover. The rollover amount is included in the taxpayer’s gross income for the year.
Caution
Although the rollover generally is not subject to the 10% early withdrawal penalty, future distributions of funds that are in the Designated Roth account that are attributable to rollovers that have not met the 5-year aging rule would be subject to the 10% penalty.
A plan participant who elects an in-plan Roth rollover cannot later recharacterize the rollover, as could be done with rollovers to Roth IRAs prior to 2018. (IRS Notice 2010-84)
Government 457 Plans & Designated Roth IRA Accounts
Governmental section 457 plans are “applicable retirement plans” that can offer a qualified Roth contribution program, effective beginning in 2011. (Code Sec. 457(e)(1)(C))
Thus, a section 457 plan maintained by a state, its political subdivision, agency, or instrumentality, or the state subdivision's agency or instrumentality, can include a qualified Roth contribution program. This provision does not apply to plans of non-profit organizations.