Tax Planning for Retirees

Designated Roth Accounts

Taxable Qualified Rollover Distributions to a Designated Roth Account. – After September 27, 2010, a retiree may be able to make a “qualified rollover contribution” from a non-Roth account to a Roth account in the same 401(k) or 403(b) plan (or after 2010 in an eligible state/local government plan). However, the terms of the plan must permit such contributions. The contributions are taxable as if the non-Roth account had distributed the funds to the retiree and he or she had retained them. Fortunately, though, the penalty tax for premature distributions does not apply.

As usual for tax-favored plans, neither a plan nor a retiree is required to pay tax currently on income earned by a designated Roth account. In addition, however, “qualified” distributions from the Roth account are not taxable. In many other respects, though, the rules governing a Roth account are the same as those governing the plan of which it is part. (Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2112.) See Chapter 7 of the treatise for a more complete discussion of designated Roth accounts.

Designated Roth Accounts in Eligible State/Local Government Plans. – After 2010, a state or local government employer may establish a designated Roth account as part of an eligible state or local government plan. Specifically, the designated Roth account must be part of an existing cash or deferred arrangement within the plan. As with such arrangements generally, a participant in a Roth program may choose to take cash compensation or make elective deferrals. The rules applicable to these Roth accounts are generally the same as those applicable to Roth accounts in 401(k) plans and TSAs. (Small Business Jobs Act of 2010, Pub. L. No. 111-240, § 2111; I.R.C. § 457.) See Chapter 7 of the treatise for a more complete discussion of designated Roth accounts.