United States: A 2013 Change In Law Makes Designated Roth Accounts More Attractive

Last Updated: December 1 2013
Article by John J. Hess

Originally published in Anderson Kill's Estate Planning and Tax Advisory, Volume 12, Number 3, Autumn 2013

Since 2006, employers have been permitted to add a designated Roth account to their 401(k) plans (or certain other cash or deferred arrangements). A designated Roth account, known as a Roth 401(k), is a separate account to which designated Roth (i.e., after tax) contributions are permitted in lieu of pretax elective contributions. A participant can designate all or a portion of a contribution to be made to his or her Roth 401(k), but once a contribution is made it cannot be changed. The plan sponsor must separately account for all contributions, distributions and earnings in the Roth 401(k). Generally, for most other purposes, such as nondiscrimination testing and restriction on in-service distributions, a Roth 401(k) is treated as if it were a pretax contributions account.

Because they are made after tax, the contributions to a Roth 401(k) are subject to tax as ordinary income when they are made (or, as discussed later, in the year of an in-plan Roth rollover), but unlike other retirement accounts, any later, qualified withdrawals are completely free of income tax. In order for a withdrawal from a Roth 401(k) to be tax-free, it must be made:

  1. at least five years after the participant in a 401(k) plan first made a Roth 401(k) contribution and
  2. on or after the date the participant:
a. attains age 59½,
b. becomes disabled or
c. dies.

These rules are similar to those governing traditional Roth IRAs.

2013 federal law increased the attractiveness of Roth 401(k) accounts. Now, if the plan so provides, an in-plan Roth rollover can be made without regard to whether the amount is otherwise distributable. Thus, a participant who is not eligible for a distribution because he or she is employed and has not attained age 59½ can make an in-plan Roth rollover from his or her pretax 401(k) account. For example, a plan participant who is age 50 can make an in-plan Roth rollover to his or her Roth 401(k). The rollover distribution would be subject to income tax in the year of the rollover, just like an outright lump sum distribution from a pretax contributions account. However, any later withdrawals would be completely free of income tax if the requirements set forth in the second paragraph above are satisfied.

Since 2010, a 401(k) plan having a designated Roth account can permit an in-plan Roth rollover — that is, a distribution from an individual's plan account (which is otherwise distributable to the participant), other than from a Roth 401(k), that is rolled over to the individual's Roth 401(k) in the same plan. Any vested amount held in a plan account for a plan participant is eligible for an in-plan Roth rollover to a Roth 401(k) in the same plan. An election by a participant to make an in-plan Roth rollover is irrevocable. This option is available to the participant or his or her surviving spouse. As a result of the U.S. Supreme Court decision that declared Section 3 of the Defense of Marriage Act unconstitutional, a surviving spouse includes a same sex spouse if the couple married in a state or country that recognizes same sex marriages.

There are several significant differences between a Roth 401(k) and a traditional Roth IRA that should be borne in mind. These include:

  1. Income Limits: A participant can make a contribution to his or her Roth 401(k) regardless of how high his or her compensation or other income is. However, an individual cannot make a contribution to a Roth IRA if modified adjusted gross income is equal to or more than $188,000 if married or $127,000 if single.
  2. Maximum Contributions: A participant can make an annual contribution to his or her Roth 401(k) up to a maximum of $17,500 ($23,000 if age 50 or older). The maximum annual contribution to a Roth IRA is only $5,500 ($6,500 if age 50 or older).
  3. Loans: 401(k) plans can permit loans from a participant's Roth 401(k). Loans are not permitted from a Roth IRA.
  4. The Five Year and Required Minimum Distributions Rules: One of the requirements for a distribution from a Roth 401(k) to be free of income tax is that it must be made at least five years after the participant in a 401(k) plan first made a contribution to his or her Roth 401(k). If the participant rolls over his or her Roth 401(k) into a newly established Roth IRA, the five-year rule begins again and distributions cannot be entirely tax-free until at least five years after the rollover. One reason for such a rollover is that a Roth 401(k) participant is subject to the required minimum distributions rules. There are no required minimum distributions rules applicable to an owner of a Roth IRA. For a Roth IRA, the required minimum distributions rules only apply to a designated beneficiary after the death of the Roth IRA owner.

The popularity of the Roth 401(k) among large employers is growing. A January 2013 survey by Aon Hewitt of large U.S. employers (those with more than 1,000 employees) revealed that while almost half (49%) of respondents currently offered no Roth 401(k), 29% of those that didn't offer a Roth 401(k) said they were very or somewhat likely to add this feature in the next 12 months.

However, studies show that participants in 401(k) plans that offer a Roth 401(k) account have been cool to making contributions to a Roth 401(k). Part of the problem is that while the Roth 401(k) is fairly simple to understand, determining whether it is a good choice for a particular participant is often anything but simple, requiring a careful assessment of a participant's age, current and future tax situation, assets outside the 401(k) and current and future cash flow requirements.

Thus, although adding a designated Roth account to a 401(k) plan is gaining popularity among employers, it is vitally important that participants are given clear and adequate guidance so they can determine whether making contributions to a Roth 401(k) is in their best interests.


John J. Hess is a shareholder in the firm's New York office. Mr Hess has extensive experience in tax law and employee benefits.

About Anderson Kill

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estate, Trusts and Tax Services, Corporate and Securities, Antitrust, Bankruptcy, Real Estate and Construction, Public Law, Government Affairs, Anti-Counterfeiting, Employment and Labor Law, Captives, Intellectual Property, Corporate Tax and Health Reform. Recognized nationwide by Chambers USA for Client Service and Commercial Awareness, and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes – with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Ventura, CA, Stamford, CT, Washington, DC, Newark, NJ and Philadelphia, PA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.