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How a Roth 403b Works
A Roth 403b is a separate account in an employer-sponsored supplemental retirement savings program. The Roth 403b tax advantages differ from traditional pre-tax plans. Contributions to a Roth 403b are made post-tax and includible in your current year’s gross income. Eligible distributions from the account (including earnings) are generally tax-free. You should consider starting a Roth 403b today if one of your goals is have tax-free income in retirement.
Can I make both pre-tax elective and designated Roth contributions in the same year?
Yes, you can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose.
Is there a limit on how much I may contribute to my designated Roth account?
Yes, the combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under IRC Section 402(g)). The limit is $18,000 in 2015 and 2016, plus an additional $6,000 in 2015 and 2016 if you are age 50 or older at the end of the year. These limits may be increased in later years to reflect cost-of-living adjustments.
Can I contribute the maximum, including catch-up contributions, to both a designated Roth account and a Roth IRA in the same year?
Yes, if you are age 50 or older, you can make a contribution of up to $24,000 to your 401(k), 403(b) or governmental 457(b) plan ($18,000 regular and $6,000 catch-up contributions) and $6,500 to a Roth IRA ($5,500 regular and $1,000 catch-up IRA contributions) for a total of $30,500 for 2015. The same contribution limits apply in 2016. Income limits apply to Roth IRA contributions
Do the same income restrictions that apply to Roth IRAs apply to designated Roth contributions?
No, there are no limits on your income in determining if you can make designated Roth contributions. Of course, you have to have salary from which to make any 401(k), 403(b) or governmental 457(b) deferrals.
What is a qualified distribution from a Roth 403b account?
A qualified distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:
If a participant dies, his or her beneficiary will also be entitled to tax-free distributions if the account has been held at least five years from the time the participant first made a Roth 403(b) contribution.
What is a 5-taxable-year period of participation? How is it calculated?
The 5-taxable-year period of participation begins on the first day of your taxable year for which you first made designated Roth contributions to the plan. It ends when five consecutive taxable years have passed.
Can I get money from the plan while I’m still employed?
The same restrictions on distributions that apply to pre-tax elective contributions also apply to designated Roth 403b contributions. A qualifying event is required to permit a qualified or non-qualified distribution.
403b Plan Qualifying Events for Distribution:
What if a distribution is not considered a qualified distribution?
If you have not held the account for more than 5 years or if the distribution is not made after death, disability, or age 59 ½, then the distribution is not a qualified distribution. Nonqualified distributions are treated as a pro-rata return of Roth contributions and earnings. The portion of the distribution that represents earnings will be subject to ordinary income tax and possibly a 10% federal penalty tax for premature distributions. However, the portion of the withdrawal that represents a return of Roth 403(b) contributions would not be subject to tax.
Do I have to take required minimum distributions (RMDs) from my Roth 403(b)?
Yes, but you can avoid them by rolling your money from a Roth 403(b) to a Roth IRA. Otherwise, you would be required to make withdrawals from the Roth 403(b) after age 701 ⁄2.
Can I take a loan from my designated Roth account?
Yes, if the plan permits.
Can I roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
Yes, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. If the distribution is made directly to you and then rolled over within 60 days, the basis portion cannot be rolled over to another designated Roth account, but can be rolled over into a Roth IRA.
How is the 5-taxable-year period calculated when I roll over a distribution from a designated Roth account to a Roth IRA?
When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.
Who is responsible for keeping track of the designated Roth contributions and 5-taxable-year period?
The plan administrator is responsible for keeping track of the amount of designated Roth contributions made for each employee and the date of the first designated Roth contribution for calculating an employee’s 5-taxable-year period.
Since a qualified distribution from a designated Roth account is not subject to taxation, must the distribution be reported?
Yes, a distribution from a designated Roth account must be reported on Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
For direct rollovers, the plan administrator is required to provide the plan administrator of the plan accepting an eligible rollover distribution, with a statement indicating either the first year of the 5- taxable-year period for the employee and the portion of the distribution attributable to basis, or, that the distribution is a qualified distribution.
For other distributions, the plan administrator must provide to the employee, upon request, the portion of the distribution attributable to basis or that the distribution is a qualified distribution. The statement is required to be provided within a reasonable period following the employee request, but in no event later than 30 days following the employee request.
Since designated Roth contributions are already included as part of wages, tips & other compensation on Form W-2, must designated Roth contributions also be identified on Form W-2?
Yes, contributions to a designated Roth account must be reported separately on Form W–2, Wage and Tax Statement.