In Retirement Plan News For Employers, February 24, 2014, the IRS offers some thoughts on Roth options for retirement plan participants. Here is what the IRS says.
If you participate in a 401(k), 403(b) or governmental 457(b) retirement plan that has a designated Roth account, you should consider your Roth options. With a designated Roth account, you can:
• make designated Roth contributions to the account; and
• if the plan permits, roll over certain amounts in your other plan accounts to the
Designated Roth Contributions
Unlike pre-tax salary deferrals, which are not taxed when you contribute them to the plan, you have to pay taxes on your designated Roth contributions. This means your gross income for the year you make designated Roth contributions will be higher than if you had made only pre-tax salary deferrals.
However, any pre-tax salary deferrals and related earnings are taxable when you
withdraw them from the plan. Roth contributions, on the other hand, are not taxed when you withdraw them from the plan. Earnings on Roth contributions are also not taxed when they are withdrawn from the plan if your withdrawal is a qualified distribution. A “qualified distribution” is a distribution that is made:
• at least 5 years after the first contribution to your Roth account; and
• after you’re age 59½ or on account of your being disabled, or to your beneficiaryafter your death.
In-Plan Roth Rollovers
Your plan may allow you to transfer amounts to your Roth account in the plan if the amounts are:
• eligible rollover distributions from your other plan accounts; or
• any amounts, including those not otherwise eligible for a distribution, from your
other plan accounts.
You must include in gross income in the year of transfer any previously untaxed amount you roll over to your designated Roth account. You don’t include in gross income any withdrawal of the amount you rolled over to the Roth account.
However, you may have to pay:
• a special recapture tax; and
• tax on the earnings on the rolled over amounts that are withdrawn, unless the
withdrawal is a qualified distribution.
Check with your employer to find out if your plan has a Designated Roth account and whether it allows in-plan Roth rollovers.