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February 19, 2009

Designated Roth Account

Your Guide

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Definition

A designated Roth account (DRA) can be a DRA-401(k) or a DRA-403(b), commonly known as Roth 401(k) and Roth 403(b).

DRAs became effective for tax years beginning January 1, 2006.

Under a DRA, a participant can irrevocably designate salary deferral contributions as designated Roth contributions. 

This can be a portion or all of the participant’s salary deferral elective contributions made to the plan.

Designated Roth contributions can be made to a DRA only if the 401(k) or 403(b) plan includes language that permits such contributions. IRS Notice 2006-44 includes a sample plan amendment that may be used by plan sponsors, and practitioners who want to provide for designated Roth contributions

Designated Roth contributions are not excluded from the participant’s taxable income. This is unlike pre-tax salary deferral contributions which are excluded from the participant’s income, resulting in a reduction of taxable income for the year that the salary deferral contribution is made to the participant’s account.

Designated Roth contributions must be maintained in an account separate from other contributions under the plan . Matching contributions and pre-tax salary deferral contributions cannot be made to a designated Roth account.

Designated Roth contributions are subject to the 402(g) limit. This means that the aggregate amount that is contributed to a designated Roth contribution,   a pre-tax 401(k) or 403(b) account, a SARSEP and a SIMPLE IRA cannot exceed  the salary reduction contribution limit in effect for the year ( $16,500 for 2009)

Referring Cite

IRC § 402A , IRS Notice 2005-95, Treas. Reg. §1.401(k)-1(f)(1), Treas. Reg. §1.401(k)-6, Treas. Reg. §1.401(m)-5, Prop. Treas. Reg. § 1.403(b)-7(a), Prop.Treas. Reg. § 1.403(b)-5(b)(1)

Additional Helpful Information

  • Qualified distributions from a DRA are tax and penalty free.  A qualified distribution is one that meets the following two requirements:
  • It occurs at least five years after the first designated Roth contribution was made to the participant’s account, and
  • It is made:
  • On or after the participant reaches age 59 ½
  • On account of the participant’s disability, or
  • On or after the participant’s death.
  • If the distribution is nonqualified, tax and the early distribution penalty may apply to the earnings
  • Automatic enrollment is permitted with designated Roth contributions
  • The ordering rules that apply to Roth IRA distributions do not apply to designate Roth contributions
  • Designated Roth contributions do not have the specific ordering rules for distributions that apply to Roth IRAs.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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