“What are the differences between Roth IRAs and designated Roth 401(k) accounts?”
Highlights of discussion
While there are many differences, the following chart summarizes some of the key dissimilarities.
| Feature | Roth IRA | Designated Roth 401(k) account |
| Investment options | Generally, unlimited, except for life insurance and certain collectibles | As specified by the plan |
| Eligibility for contribution | Must have earned income under $144,000 if a single tax filer or under $214,000 if married filing a joint tax return | · Access to a 401(k), 403(b) or governmental 457(b) plan with a designated Roth contribution option and
· The individual must meet eligibility requirements as specified by the plan |
| Contribution limit (2022) | $6,000 ($7,000 if age 50 or older) | $20,500 ($27,000 if age 50 or older) |
| Conversions | Anyone with eligible IRA or employer-plan assets may convert them to a Roth IRA | Plan permitting, anyone with eligible plan assets may convert them within the plan to a designated Roth account |
| Recharacterize contribution | Yes, within prescribed period | No |
| Required minimum distributions | Not during owner’s lifetime | Yes |
| Tax- and penalty-free qualified distributions, regardless of type of money | Taken
· After owning the Roth IRA for five years and · Age 59 ½, death, disability, or for first home purchase |
Must have a distribution–triggering event under plan terms, plus
· Five years after owning the designated Roth account and · Age 59 ½, death, or disability |
| Tax and/or penalty on nonqualified distributions based on type of money | According to IRS distribution ordering rules:
1. Contributions: Always tax- and penalty-free 2. Taxable Conversions: On a first-in, first-out basis by year; always tax-free; penalty if taken within five years of conversion 3. Nontaxable conversions: On a first-in, first-out basis by year; always tax- and penalty-free 4. Earnings: Taxed as ordinary income, subject to penalty unless exception applies |
Withdrawals represent a pro-rata return of contributions and earnings in the account; earnings are taxable and subject to penalty unless an exception applies. See I [1]RS Notice 2010-84 [2] for rules applicable to the return of designated Roth 401(k) converted amounts |
| Timing of distributions | At any time, subject to tax and/or penalty depending on type of assets distributed | Following plan-defined, distribution triggering events |
| Loans | No | Yes, if plan permits |
| Five-year holding period for qualified distributions | Begins January 1 of the year a contribution or conversion is made to any Roth IRA of the owner | · Separate for each 401(k) plan in which an individual participates
· Begins January 1 of the year a contribution or in-plan conversion is made to the account |
| Beneficiary | Anyone, but spousal consent required in community property states | Anyone, but spousal consent required |
Conclusion
While both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other or both may be right for a particular investor depends on the individual’s circumstances and goals and should be determined based on a thorough conversation between the investor and his or her tax advisor.