Unlike a traditional pre-tax deferred compensation plan, the Roth deferred compensation option allows you to contribute money after taxes, but then withdraw tax-free dollars from your account when you retire. Technically, employer-sponsored retirement plans, such as 401 (k) accounts, which are also known as qualified plans, are a form of deferred compensation. However, when most people talk about deferred compensation, they are referring to what are known as unqualified deferred compensation plans. These unqualified plans have different attributes, some of which are advantageous and others can be harmful.
A designated Roth contribution is a type of elective deferral that employees can make to their government 401 (k), 403 (b), or 457 (b) retirement plan. How Roth IRAs fit In both unqualified deferred compensation plans and traditional 401 (k) plans, contributions are excluded from taxable income at the time of the initial contribution. If the plan includes both traditional pre-tax elective contributions and designated Roth contributions, the plan must indicate how the employer will distribute its automatic contributions between pre-tax elective contributions and designated Roth contributions. When transferring a distribution from a designated Roth account to a Roth IRA, the period when the transferred funds were in the designated Roth account is not counted for the 5 tax year period to determine qualifying Roth IRA distributions.
However, your employer can only assign your designated Roth contributions to your designated Roth account. A designated Roth account is a feature of new or existing 401 (k), 403 (b), or 457 (b) government plans. The amount contributed to a designated Roth account is included in the gross income for the contribution year, but eligible distributions from the account (including earnings) are generally exempt from tax. Yes, the combined amount contributed to all designated Roth accounts and traditional pre-tax accounts for any person in a year is limited (according to section 402 (g) of the IRC).
However, an employee who transfers a distribution from a designated Roth account to a Roth IRA must keep a record of the amount transferred in accordance with the PDF instructions on Form 8606, IRASPDF, non-deductible. Choosing a retirement savings plan can seriously affect your after-work finances, and some workers should consider combining deferred compensation and Roth IRA savings to meet their goals. When a 401 (k) plan includes a Roth feature, any 401 (k) plan participant who is eligible to make traditional deferrals can also make Roth deferrals. However, Roth 401 (k) RMDs can be avoided by transferring their amount to a Roth IRA before the RMD deadline.
A Roth reinvestment within the plan, also called Roth conversion within the plan, is a reclassification of non-Roth 401 (k) funds to Roth funds. Therefore, if the previous contribution was made more than 5 years ago and you are over 59 and a half years old, a distribution of the amounts attributable to a cumulative contribution from a designated Roth account would be a qualified distribution from the Roth IRA. If the distribution is made directly to you and then transferred within 60 days, the basic portion cannot be transferred to another designated Roth account, but can instead be transferred to a Roth IRA account. Yes, a plan may provide that a highly paid employee (HCE), as defined in Section 414 (q) of the Code, who makes traditional pre-tax elective contributions and designated Roth contributions for one year may choose to attribute excess tax contributions to designated or elective Roth contributions before taxes.
Participants are more likely to reinvest Roth accounts depending on the plan in tax years when their income is low or when the balance of a non-Roth account has declined in value. .