Designated Roth Accounts ( Roth 401k Or Roth 403b)

Designated Roth Accounts or Roth 401k are simply 401k plans that allow employees to designate all or part of their elective deferrals as qualified Roth 401k contributions. Qualified Roth 401k contributions are made on an after-tax basis, just like Roth IRA contributions. This means that employee contributions and earnings are entirely free from federal income tax when distributed from the plan, subject to qualifications. Contributions are not deducted from income (as regular 401k or deductible IRA contributions are). This article discusses qualified Roth 401k contributions.

Caution: 401k sponsors are not required to allow Roth contributions to their plans. But if they do, the 401k plan also can’t be a “Roth only” plan. That is, if the 401k plan allows Roth 401k contributions, then employees must be allowed to make both Roth contributions and pre-tax contributions.  SIMPLE 401k and safe-harbor 401k plans can also allow Roth contributions, as can 403b Plans.  The rules discussed in here generally apply to Roth 403b accounts as well.

Roth 401k contributions

In general

Technically, an employee makes a Roth 401k contribution by making an elective deferral under the 401k plan, irrevocably designating all or part of that deferral as a Roth 401k contribution.  Roth 401k contributions are treated the same as pre-tax 401k elective deferrals for all plan purposes, except that they are included in an employee’s wages for tax purposes at the time of contribution (i.e., Roth 401k contributions are after-tax contributions, where pre-tax 401k contributions are deducted from income before payroll tax). Both types of contribution are subject to Social Security and Medicare tax when earned.

A 401k plan must establish a separate Roth 401k account (designated Roth accounts, or DRACs) to house each employee’s Roth 401k contributions. The Roth 401k account is treated as a “separate contract” under the 401k plan, requiring separate accounting for the Roth contributions, as well as any gains or losses on those contributions. The taxation of distributions from the Roth account is also determined separately from any other plan dollars.