The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with an advisor in Massachusetts is representative of a common inquiry involving Roth IRAs vs. designated Roth contributions in 401(k) plans. The advisor asked:
“What are the differences between Roth IRAs and designated Roth 401(k) accounts?”
Highlights of Discussion
The following chart summarizes the key differences:
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 $131,000 if single tax filer or under $193,000 if married filing joint tax return |
| 401(k), 403(b) or governmental 457(b) plan with designated Roth contribution option; individual must meet eligibility requirements as specified by the plan |
Contribution limit |
| $5,500 ($6,500 if age 50 or older) |
| $18,000 ($24,000 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 |
Recharacterize conversion |
| Yes, within prescribed time frame |
| No |
Required minimum distributions |
| Not during owner’s lifetime |
| Yes |
Tax-free qualified distributions |
| After five years and age 59½; death; disability; or for first home purchase |
| Must have distribution-triggering event; then after five years and age 59½; death; or disability |
Tax on nonqualified distributions |
| According to distribution ordering rules: |
| Withdrawals represent a pro-rata return of contributions and earnings in account; earnings 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 |
| Following plan defined distribution-triggering event |
Loans |
| No |
| Yes, if plan permits |
Five-year holding period for qualified distributions |
| Begins January 1 of the year a contribution is made to any Roth IRA of the owner |
| Separate for each designated Roth 401(k) account; begins January 1 of the year a contribution is made to that account |
Beneficiary |
| Anyone, but spousal consent required in community property states |
| Anyone, but spousal consent required |
Conclusion
While both Roth IRAs and designated Roth 401(k) plan contributions offer the potential for tax-free withdrawals, there are several key differences between the two arrangements. Whether one, the other or both may be right for a particular investor depends on the individual’s circumstances and goals, and ultimately should be determined based on a thorough conversation between the investor and his or her tax advisor.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.
© 2015 Columbia Management Investment Advisers, LLC. Used with permission.
