The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk 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 California is representative of a common inquiry regarding the differences between the two types of after-tax contributions possible in 401(k) plans (i.e., designated Roth contributions and employee after-tax contributions). The advisor asked:
“What are the key differences between designated Roth contributions and employee after-tax contributions in 401(k) plans?”
Annual Limit
• Designated Roth contribution: Combined with participant’s pre-tax salary deferrals under IRC Sec. 402(g); 2013 maximum $17,500 (or $23,000 for age 50 and older); plan-imposed limit may apply.
• Employee after-tax contributions: Combined with all plan contributions for participant under IRC Sec. 415(c); 2013 maximum is 100% of participant’s pay up to $51,000 (or up to $56,500 if making catch-up contributions; plan-imposed limit may apply.
Tests
• Designated Roth contribution: Actual deferral percentage test.
• Employee after-tax contributions: Actual contribution percentage test.
When Distributable
• Designated Roth contribution: According to plan terms; not prior to age 59-1/2 unless for hardship.
• Employee after-tax contributions: According to plan terms; could be at any time without age restriction.
Availability of tax-free Withdrawals
• Designated Roth contribution: According to plan terms; after five years and attainment of age 59-1/2, death or disability.
• Employee after-tax contributions: According to plan terms; separately accounted for pre-1987 contributions; post-1986 amounts based on pro rata share of contributions and earnings, with earnings taxable.
Ability to Roll Over
• Designated Roth contribution: Yes, when distributable and only to another designated Roth account or Roth IRA.
• Employee after-tax contributions: Yes, when distributable to a traditional or Roth IRA or eligible employer plan that will accept and will separately account the assets.
Ability to Convert
• Designated Roth contribution: N/A
• Employee after-tax contributions: Yes
Plan Language Required to Allow
• Designated Roth contribution: Yes
• Employee after-tax contributions: Yes
Subject to Required Minimum Distributions
• Designated Roth contribution: Yes
• Employee after-tax contributions: Yes
Conclusion
It’s possible for 401(k) plans to offer participants the ability to make two types of after-tax contributions to their plans:
• Designated Roth contributions
• Employee after-tax contributions
Financial advisors who understand the differences between the two set themselves apart from the average advisor and are better positioned to help their 401(k) plan clients maximize their retirement savings contributions.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.
