Case of the Week: Roth IRA vs. Designated Roth 401(k) Accounts

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 qualifieddistributions, regardless of type of money

• After owning the Roth IRA for five years and 
• Age 59½, 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 59½, death, or disability

Tax and/or penalty on nonqualifieddistributions 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 IRS Notice 2010-84 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 Jan.y 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 Jan. 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