A designated Roth account sits inside an employer's 401(k) plan but borrows its distribution mechanics from the Roth IRA. Which feature does it take from the Roth IRA rather than from the traditional 401(k) around it?

Qualified distributions leave the plan free of federal income tax, accumulated earnings included

The account is held in the participant's own name at a bank or broker outside the plan

Contributed amounts may be taken out at any time, with no distributable event required first

The employer must match every dollar the participant directs into the account under the plan

An employee designated her March elective deferral as a Roth contribution. In November her taxable income falls sharply and she asks the plan to treat that March deferral as pre-tax instead. What does IRC Section 402A allow?

A change at any point before the plan year closes, provided the annual deferral limit is not exceeded

Nothing for the March deferral: once the contribution was made the designation could no longer be changed

A change at any point before she files her federal return for the year, as with other tax elections

A change for any deferral made in the same calendar quarter, the plan correcting its records afterwards

An employee with $90,000 of salary directs $9,000 of elective deferrals to her plan's designated Roth account for the year. What wage figure does her employer report as taxable on her Form W-2?

$81,000 for federal purposes and $90,000 for state purposes, the exclusion running only to federal tax

$81,000, because an elective deferral to a 401(k) plan is left out of the wages reported for the year

$90,000, because a designated Roth deferral is not excluded from her taxable wages for the year

$85,500, half of the deferral being excluded because the account is funded on an after-tax basis

A 401(k) plan must keep its accounting of designated Roth contributions, their earnings and their losses separate from the participant's pre-tax account. What does that separation make possible?

The plan can trace each distribution to after-tax Roth funds or to pre-tax funds and tax it accordingly

The plan can offer the Roth account a different menu of investment funds from the pre-tax account's menu

The participant can set losses in the Roth account against gains in the pre-tax account for each year

The plan can waive the ten percent early withdrawal penalty on amounts drawn from the Roth account

For 2024 the elective deferral limit under IRC Section 402(g) is $23,000. A 40-year-old participant has already deferred $15,000 into her plan's designated Roth account for 2024. How much more may she defer into the pre-tax traditional account that year?

$23,000, because the pre-tax portion of the plan carries a deferral limit of its own

$8,000, because one limit covers her deferrals to the two portions of the plan together

$7,000, because her pre-tax room for the year is reduced by the separate annual limit on individual retirement account contributions

Nothing, because designating any deferral as Roth uses up the whole year's capacity

A participant earning $600,000 a year is told that her income puts a Roth IRA contribution out of reach for 2024. What designated Roth contribution may she make to her employer's 401(k) plan?

A reduced amount, the deferral limit itself phasing down as her income rises above the published threshold

None, because the Roth phase-out ranges apply to every Roth account, an employer plan's as much as an IRA's

The whole elective deferral limit, since no income-based phase-out reaches designated Roth contributions

The whole limit, but only once she has exhausted her pre-tax deferral capacity for the year in the same plan

For 2024 the elective deferral limit is $23,000, with a further $7,500 catch-up contribution for participants aged fifty or older. A 55-year-old wants to put as much of her own deferrals as she can into the designated Roth account. What is the most she may direct there for the year?

$15,250, half of the combined figure, the remainder being reserved for pre-tax deferrals

$23,000, because the catch-up amount has to be made as a pre-tax traditional deferral

$7,500, because only the catch-up part of her deferrals may be designated as Roth contributions

$30,500, the limit plus the catch-up, all of which she may designate as Roth contributions

An employee directs every dollar of her own deferrals to the designated Roth account. Her employer's plan has not adopted the SECURE 2.0 option for Roth matching. Where does the employer's match go, and what follows at distribution?

To the pre-tax account, leaving her a balance whose distributions will be taxed as ordinary income

To the designated Roth account, because the match follows the account her own deferrals go into

To the pre-tax account, though its distributions are tax-free because her own deferrals were Roth

To the designated Roth account, with the employer deducting the match only when she is paid out

A plan has adopted the SECURE 2.0 option letting employees take employer matching contributions in the designated Roth account. The plan's match vests over three years. Which matching amounts may an employee designate as Roth?

All of the match, the vesting schedule applying whichever account ends up holding it

Only amounts that are already fully vested when he makes the designation

Only the part of the match that is scheduled to vest before that plan year ends

All of the match, since an employee is always fully vested in his own deferrals

An employee whose plan permits it elects to receive a $4,000 employer matching contribution in his designated Roth account rather than the pre-tax account. How does that election affect his income tax for the year?

The $4,000 stays out of his income for good, amounts held in a Roth account never being taxed

The $4,000 stays out of his income until it is distributed, just as a pre-tax match would be

The $4,000 counts in his gross income for the year the employer pays it into the plan

The $4,000 enters his income only to the extent that it exceeds his own deferrals for the year

A participant made her first designated Roth contribution in November 2021, as a deferral for the 2021 taxable year. She turned sixty in 2025 and takes a distribution in February 2026. Is the five-year participation requirement satisfied?

Yes, because reaching sixty satisfies the participation requirement as well as the age test

No, because the period runs from the contribution itself and so ends in November 2026

No, because the period starts on the first day of the year after her first contribution

Yes, because the period started on January 1, 2021, the first day of that taxable year

A participant who has made designated Roth contributions for eight years becomes totally and permanently disabled at forty-four and takes his whole designated Roth balance. How does the distribution qualify, or fail to?

It is qualified, because total and permanent disability is itself a qualifying distributing event

It is not qualified, because no distributing event occurs before fifty-nine and a half is reached

It is qualified as to his contributions only, the earnings waiting until he is fifty-nine and a half

It is not qualified, but the earnings escape the ten percent penalty because he is disabled

A 45-year-old's designated Roth account holds $40,000, of which $30,000 is contributions and $10,000 is earnings. He takes a $6,000 distribution that is not a qualified distribution. How much of it goes into his gross income?

Nothing, because contributions come out first and $6,000 is well under the $30,000 of them

$1,500, the earnings share of the distribution worked out pro rata across the account

$6,000, the whole distribution, because it fails the qualified distribution requirements

$10,000, the account's entire earnings, once any non-qualified distribution has been taken

For tax years before 2024, a designated Roth account in an employer plan was subject to lifetime required minimum distributions. What could a participant who wanted no forced distributions from that balance do about it?

Apply to the IRS to postpone the required distributions until the account was closed

Elect to have the plan compute the required amount on the pre-tax balance alone instead

Roll the balance into a Roth IRA, which has never carried lifetime required distributions

Have the plan move the balance into its pre-tax account, where the rules did not apply

A 56-year-old in the 35 percent bracket during her peak earning years expects to retire on far less income, in the 12 percent bracket. Which way of making her 401(k) deferrals fits that expectation, and why?

Pre-tax traditional deferrals, because distributions from them are tax-free once she is fifty-nine and a half

Designated Roth deferrals, because the deduction taken in a high bracket is recaptured when the account is distributed

Designated Roth deferrals, because a tax-free distribution is worth more than a deduction in any bracket

Pre-tax traditional deferrals, excluding income at 35 percent now and taxing the distributions at 12 percent

A designated Roth account is not subject to lifetime required distributions, so a high earner who funds his living costs from other assets leaves his untouched. What does that leave for his beneficiaries?

An accumulated balance they draw over the applicable beneficiary period, free of income tax

An accumulated balance they may hold for as long as they like, no distribution period applying

An accumulated balance outside his taxable estate, the income tax on it having been paid already

An accumulated balance they may each move into their own 401(k) plans and leave there untouched

A participant leaving her job may roll her designated Roth balance to a Roth IRA or to her new employer's designated Roth account. She is worried about exposure to future creditors. What favours the employer plan?

An employer plan can hold the balance in assets that a creditor is unable to identify or to value

ERISA plan assets are generally better protected from creditors than IRA assets are under state law

Only an employer plan can take the balance without the rollover being treated as a taxable event

IRA assets lose their retirement character on a rollover and count as ordinary savings afterwards

A participant changing jobs wants to keep his designated Roth balance inside an employer plan rather than move it to an IRA. What has to be the case for him to do that?

His new employer's plan must credit him with the service he had built up under the old plan

The old and new plans must share a recordkeeper, so his Roth contribution history carries over

His new employer's plan must be one that accepts rollovers of designated Roth accounts

He must route the balance through a Roth IRA before the new employer's plan can take it in

A participant has made designated Roth contributions to his employer's 401(k) plan every year for the past twelve years. On retiring he rolls the whole designated Roth balance into a Roth IRA, which is the first Roth IRA he has ever held. From which year does the five-year period governing that Roth IRA run?

The first year of his designated Roth contributions, because that twelve-year participation period moves across to the Roth IRA with the funds themselves

The year of the rollover for the earnings rolled in, and the first year of his designated Roth contributions for the after-tax amounts he had deferred

No fresh period runs at all, because the five-year requirement had already been satisfied inside the designated Roth account before the money moved

The year of the rollover, because the time the funds spent in the designated Roth account does not carry over to the receiving Roth IRA

In September an employee who has made only pre-tax deferrals to her 401(k) plan since January decides she would rather save in the designated Roth account from now on. Under IRC Section 402A, how may she do that?

By waiting until the start of the next plan year, a Roth designation having to cover every deferral in a whole plan year

By designating each deferral she makes from September on as a Roth contribution, at the time she defers it

By designating deferrals as Roth only after she has deferred the full annual limit on a pre-tax basis for the year

She cannot, an employee's choice between pre-tax and Roth deferrals being fixed for good at the time she enrols

An employee's 401(k) plan holds a designated Roth account, a pre-tax traditional account and an account for her employer's matching contributions. From which of the other accounts must the plan keep the designated Roth contributions, and the earnings and losses on them, separate?

The pre-tax traditional account, on the footing that employer matching money is after-tax and so belongs with the Roth balance

The employer matching account, on the footing that elective deferrals of either kind belong together in one elective deferral record

Both the pre-tax traditional account and the employer matching account, each being tracked on its own

Neither of them, a single combined record sufficing so long as each distribution is identified when it is paid out

A participant's 401(k) plan year is the calendar year, and she turns fifty on December 20. For which plan year, and to what extent, may she first make the age-fifty catch-up contribution?

For the following year, in full, because age is tested on the first day of each plan year

For the year she turns fifty, but only on deferrals she makes from her December 20 birthday on

For the following year, but at a reduced amount until she has been fifty for a whole plan year

For the year she turns fifty, in full, because she is fifty at some point during that plan year

For 2024 the elective deferral limit is $23,000. A 38-year-old defers $14,000 to her plan's designated Roth account and $11,000 to its pre-tax account during the year. By how much, if at all, do her deferrals exceed the limit?

$2,000, because her designated Roth and pre-tax deferrals count against the one limit together

$2,500, because her designated Roth deferrals may not exceed half of the $23,000 limit

Not at all, because designated Roth deferrals are after-tax money and fall outside the deferral limit

Not at all, since the deferral limit rises for any participant who splits deferrals between the two portions

An employer's 401(k) plan has adopted the SECURE 2.0 Act's option for employer Roth contributions. Which kinds of employer contribution may employees then choose to receive in the designated Roth account?

Matching contributions only, nonelective contributions staying in the pre-tax account

Matching contributions and nonelective contributions alike, each at the employee's own election

Matching contributions only, and only the part that matches the employee's own Roth deferrals

Matching contributions, with nonelective contributions reserved to employees aged fifty or over

By 2024 the SECURE 2.0 Act's option for employer Roth contributions had been law for over a year, yet many 401(k) participants still could not use it. What accounts for that?

The option did not take effect until plan years beginning in 2026

The option was confined to plans whose employees direct all of their own deferrals to the Roth account

Many plan administrators and recordkeeping systems had not yet built the infrastructure it needs

The option could be used only by employees whose deferrals had already reached the annual limit

A participant made her first designated Roth contribution to her first employer's 401(k) plan for 2015. Her first designated Roth contribution to her new employer's plan was for 2023, and in 2024 she rolled the old plan's designated Roth balance directly into the new plan. From which year is the five-year participation period of the new plan's designated Roth account measured?

2023, the first year of designated Roth contributions to the receiving plan itself

2024, the year of the rollover into the receiving plan

2015 for the rolled-in balance, and 2023 for the contributions made to the new plan

2015, the earlier of the two plans' first designated Roth contribution years

A 40-year-old has made designated Roth contributions to her 401(k) plan for ten years, and her plan permits her to withdraw $15,000 of the balance to buy the first home she has ever owned. Is the withdrawal a qualified distribution?

No, because buying a first home is not one of the distributing events for a designated Roth account

Yes, because buying a first home is a distributing event once the five-year requirement has been met

No, because a first home purchase is a distributing event only for a participant who has left the employer

Yes, because any withdrawal the plan permits counts as a distributing event once five years have passed

A 401(k) participant says her choice between pre-tax and designated Roth deferrals comes down to which kind of deferral is larger or more generously matched. What is the choice fundamentally a decision about?

How much she may defer in all, the annual limit being larger for one kind of deferral than for the other

When the income tax is paid, set against the marginal rate she expects now and the rate she expects at distribution

Whether she can receive an employer match at all, the match being offered only on deferrals of one of the two kinds

Whether she is eligible, designated Roth deferrals being open only to participants below an income threshold

A 70-year-old who has held his designated Roth account for fifteen years, and does not need the money, moves $50,000 out of it into a taxable brokerage account and invests it there. What tax cost does the move carry in the years that follow?

None, its later growth staying tax-free because it came out of a designated Roth account

The money's later growth is taxable only once it exceeds the contributions he made to the Roth account

The money's later growth becomes taxable, where inside the account it would have kept growing tax-free

None for five years, after which the money's later growth is taxed as if it had never been in a Roth

A participant whose marginal federal income tax rate is 24 percent and whose marginal state income tax rate is 5 percent defers $10,000 into the pre-tax traditional account of her 401(k) plan. By how much does the deferral reduce her federal and state income taxes for the year?

$2,400, because the exclusion lowers her federal income tax only and her state tax is computed on the full salary

$10,000, because the whole amount deferred comes off the tax she owes for the year dollar for dollar

Nothing this year, because the tax on the deferral is merely moved to the year of distribution and her tax for the year is unchanged

$2,900, the deferral being left out of income that both federal and state tax reach at her marginal rates

Roth 401k: Contribution Limits, Five-Year Rule and RMDs

What Is a Roth 401(k) and How Does It Work?

A Roth 401(k) — formally called a designated Roth account — is a separate account within an employer-sponsored 401(k) plan to which an employee may direct elective deferrals on an after-tax basis, receiving no current income tax deduction for those contributions but positioning all future qualified distributions — including all accumulated earnings — to be received entirely free of federal income tax.

The designated Roth account was created by the Economic Growth and Tax Relief Reconciliation Act of 2001 and became available to plan participants beginning January 1, 2006, under the framework established in Internal Revenue Code Section 402A.

It combines the high contribution limits and employer matching structure of a traditional 401(k) with the tax-free distribution mechanics of a Roth IRA — without the income-based contribution limits that restrict Roth IRA eligibility for higher-income participants — making it one of the most powerful and flexible tax-advantaged retirement savings vehicles available to American workers.

The Statutory Framework — IRC Section 402A

Internal Revenue Code Section 402A — Optional Treatment of Elective Deferrals as Roth Contributions — establishes the legal framework for designated Roth accounts and specifies the conditions under which contributions qualify as designated Roth contributions and under which distributions qualify as tax-free qualified distributions.

The Treasury Department issued final regulations implementing Section 402A in Treasury Decision 9237 effective January 3, 2006, supplemented by subsequent guidance codified at 26 CFR Part 1, Section 1.402A-1.

A designated Roth contribution under Section 402A is an elective deferral that the employee irrevocably designates as an after-tax contribution at the time of deferral — the designation cannot be changed after the contribution is made.

The employer includes the designated Roth contribution in the employee’s gross income for the year of contribution — unlike traditional pre-tax 401(k) deferrals, which reduce taxable income in the year of deferral.

The contributed amount is reported on the employee’s W-2 as taxable wages, and income tax is paid on the contribution in the current year.

The plan must maintain a separate accounting of designated Roth contributions, the earnings thereon, and any losses attributable to the designated Roth account — separate from the employee’s pre-tax traditional 401(k) account and from any employer matching or nonelective contribution account.

This separate accounting requirement exists so that the plan can track which distributions come from after-tax designated Roth funds — entitled to tax-free qualified distribution treatment — and which come from pre-tax funds — subject to ordinary income tax upon distribution.

Contributions — Limits and Mechanics

The contribution limit for designated Roth contributions is the same annual elective deferral limit that applies to all 401(k) plan elective deferrals under IRC Section 402(g) — twenty-four thousand five hundred dollars for 2026, with an additional eight thousand dollar catch-up contribution available to participants who are age fifty or older during the plan year, or an enhanced eleven thousand two hundred fifty dollar catch-up contribution, in place of the standard catch-up amount, for participants who attain age sixty, sixty-one, sixty-two, or sixty-three during the calendar year.

This combined limit applies to the participant’s total elective deferrals across both the traditional pre-tax and designated Roth portions of their 401(k) — the participant may allocate any proportion of the total deferral limit between traditional pre-tax and designated Roth contributions, but the combined total cannot exceed the annual limit.

This combined limit structure means that a participant who maximises their designated Roth contributions at twenty-four thousand five hundred dollars has used their entire elective deferral limit and cannot make additional pre-tax traditional contributions in the same year.

Conversely, a participant who defers twenty-four thousand five hundred dollars in traditional pre-tax contributions has no remaining capacity for designated Roth contributions that year.

Beginning in 2026, catch-up contributions are also subject to a Roth requirement.

Under SECURE 2.0, a participant whose Social Security (FICA) wages from the employer sponsoring the plan in the preceding calendar year exceeded an indexed threshold — one hundred fifty thousand dollars for 2026, measured on 2025 wages — must make any catch-up contributions as designated Roth contributions rather than as pre-tax contributions.

The final regulations generally apply beginning in 2027, with employers required to follow a reasonable, good-faith interpretation of the statute for 2026.

A plan that permits catch-up contributions but does not offer a designated Roth option may bar those higher-paid participants from making catch-up contributions altogether.

The designated Roth account is not subject to the income-based phase-outs that limit Roth IRA contributions.

For 2026, the ability to contribute to a Roth IRA phases out for single and head-of-household filers with modified adjusted gross income between one hundred and fifty-three thousand and one hundred and sixty-eight thousand dollars, and for married filing jointly filers between two hundred and forty-two thousand and two hundred and fifty-two thousand dollars.

No such income limit applies to Roth 401(k) contributions — a participant earning five hundred thousand dollars or one million dollars annually may direct the full elective deferral limit into the designated Roth account, making the Roth 401(k) particularly valuable for high-income employees who are ineligible to contribute to a Roth IRA directly.

Employer Matching Contributions — The SECURE 2.0 Change

Traditional employer matching contributions — amounts the employer contributes based on the employee’s deferral rate — were historically required to be made on a pre-tax basis to the traditional 401(k) account regardless of whether the employee’s own deferrals were directed to the designated Roth account.

This meant that even employees who directed all of their deferrals to the Roth account still accumulated a pre-tax traditional account balance from employer matching contributions.

The SECURE 2.0 Act of 2022 — enacted as Division T of Public Law 117-328 — created a new option allowing employers to permit employees to designate employer matching and nonelective contributions as Roth contributions, receiving them in the designated Roth account rather than the traditional pre-tax account.

Under this SECURE 2.0 provision, employer Roth contributions are includible in the employee’s gross income in the year they are allocated to the account and are reported on Form 1099-R rather than as W-2 wages, and they are not subject to federal income tax withholding or, generally, Social Security and Medicare taxes.

The provision requires that employer Roth contributions be fully vested at the time of designation — employers cannot offer Roth treatment for unvested matching contributions.

While this provision was effective immediately upon enactment in December 2022, it is optional, and it is available only if the employer’s plan has been amended to allow it and the plan’s recordkeeping systems support it.

Qualified Distributions — The Five-Year Rule and Age Requirements

For a distribution from a designated Roth account to be a qualified distribution — received entirely free of federal income tax including all accumulated earnings — two conditions must both be satisfied simultaneously.

The five-year participation requirement must be met. The five-year period begins on the first day of the taxable year for which the participant first made designated Roth contributions to that plan — the period is measured separately for each plan unless designated Roth assets are rolled over from another plan.

Under Treasury Regulation 26 CFR Section 1.402A-1, if a participant rolls over designated Roth assets from one employer’s plan to another employer’s plan, the five-year period for the recipient plan is measured from the earlier of the first year of Roth contributions to either plan — preserving the participant’s prior Roth seniority.

If the participant rolls the designated Roth account into a Roth IRA, the Roth IRA’s own five-year period governs — which may be more or less favourable depending on when the Roth IRA was first established.

The distributing event requirement must also be met. The participant must be at least age fifty-nine and a half at the time of distribution, or the distribution must be made on account of the participant’s death and paid to a beneficiary or the estate, or the distribution must be on account of the participant becoming totally and permanently disabled.

Distributions that do not satisfy both conditions simultaneously — either because five years have not elapsed or because none of the qualifying distributing events has occurred — are non-qualified distributions.

Non-qualified distributions from a designated Roth account are partially taxable — the pro-rata earnings portion is included in gross income and may be subject to the ten percent early withdrawal penalty under IRC Section 72(t) if the participant is under age fifty-nine and a half, while the return of after-tax contributions is always received tax-free since those amounts were already taxed in the year of contribution.

Required Minimum Distributions — The SECURE 2.0 Elimination

Prior to the SECURE 2.0 Act of 2022, designated Roth accounts in employer-sponsored plans were subject to required minimum distribution rules beginning at the applicable RMD starting age — unlike Roth IRAs, which have never been subject to lifetime RMDs.

This disparity between Roth 401(k) and Roth IRA RMD treatment was widely criticised as administratively inconvenient and economically illogical, given that distributions from both account types are tax-free when qualified.

The SECURE 2.0 Act eliminated lifetime RMDs from designated Roth accounts in employer-sponsored plans effective for tax years beginning after December 31, 2023 — meaning that beginning in 2024, participants are no longer required to take minimum distributions from their Roth 401(k) accounts during their lifetime.

This change aligns the Roth 401(k) with the Roth IRA for lifetime distribution purposes and removes the primary practical disadvantage of the Roth 401(k) relative to the Roth IRA — the former requirement to either take unwanted distributions or roll the balance to a Roth IRA to avoid RMDs.

The Roth 401(k) Versus the Traditional 401(k) — The Tax Timing Decision

The choice between making traditional pre-tax and designated Roth contributions to a 401(k) plan is fundamentally a decision about the timing of income tax payment relative to the expected tax rates at contribution time versus distribution time.

Traditional pre-tax contributions reduce taxable income now — the deferral amount is excluded from gross income in the year of contribution, reducing current federal and state income taxes at the participant’s current marginal rate.

Tax is paid later, when distributions are received in retirement, at the then-applicable marginal rate.

This structure benefits participants who expect to be in a lower marginal tax bracket in retirement than during their working years — they defer income tax from a high-rate year to a lower-rate year.

Designated Roth contributions provide no current deduction — the contribution amount is taxed now at the current marginal rate.

But qualified distributions in retirement are entirely tax-free — no federal income tax on principal or earnings regardless of how much the account has grown.

This structure benefits participants who expect to be in a higher marginal tax bracket in retirement than during their working years — they pay tax now at the lower current rate and avoid tax later at the higher future rate.

The decision also has an RMD planning dimension. Because Roth 401(k) accounts are now exempt from lifetime RMDs under SECURE 2.0, high-income participants who do not need distributions for living expenses can allow the Roth account to continue growing tax-free indefinitely — passing the accumulated tax-free balance to heirs, who under the post-SECURE Act beneficiary rules generally must withdraw the inherited balance within ten years, except that eligible designated beneficiaries, such as a surviving spouse, may stretch distributions over their life expectancy.

This estate planning advantage, combined with the elimination of forced distributions that would otherwise have had to be moved out of the tax-free account and reinvested where their future growth would be taxable, makes the Roth 401(k) particularly compelling for high-income participants with strong financial capacity to fund current living expenses from other sources.

Rollovers From the Roth 401(k)

Upon leaving employment or retiring, participants may roll their designated Roth account balance to a Roth IRA without current tax consequence — the rollover is not a taxable event because the funds move from one Roth environment to another.

Under Treasury Regulation 26 CFR Section 1.408A-10, the designated Roth account’s own participation period does not carry over to the receiving Roth IRA.

The Roth IRA’s five-year period runs from the earlier of the first year the participant contributed to any Roth IRA or the year the rollover itself is made, determined independently of the years the funds spent in the designated Roth account — so a participant who already holds a Roth IRA with a five-year history has that history govern the rolled-over amounts, while a participant whose first Roth IRA is the one receiving the rollover starts the clock in that year however long the designated Roth account was held.

Participants may also roll designated Roth account balances to a new employer’s 401(k) plan that accepts Roth rollovers, maintaining the employer plan environment rather than moving to an IRA — useful for participants who want to preserve the creditor protection advantages of ERISA plan assets, which are generally superior to the creditor protection afforded to IRA assets under state law.

Examination Relevance and Key Takeaways

The Roth 401(k) is tested on the Series 65 examination in the context of retirement planning, tax treatment of employer plan contributions and distributions, the five-year rule, the SECURE 2.0 Act changes, and the comparison between Roth and traditional pre-tax treatment.

The key points to retain are these.

A Roth 401(k) — designated Roth account — is established under IRC Section 402A and allows employees to make after-tax elective deferrals to a separate account within a 401(k) plan, with all future qualified distributions received entirely free of federal income tax.

The contribution limit equals the standard annual elective deferral limit — twenty-four thousand five hundred dollars for 2026 with eight thousand dollar catch-up for age fifty and older, or eleven thousand two hundred fifty dollars for ages sixty to sixty-three — shared between traditional pre-tax and designated Roth contributions with no separate Roth 401(k) limit and no income-based phase-out restricting eligibility regardless of income level. Beginning in 2026, catch-up contributions by participants whose prior-year FICA wages from the plan sponsor exceeded the indexed threshold must be made as designated Roth contributions.

Qualified distributions require two simultaneous conditions: five taxable years of participation measured from the first year of designated Roth contributions to the plan or to a plan rolled into it, and a qualifying distributing event — age fifty-nine and a half, death, or total disability.

Non-qualified distributions return after-tax contributions tax-free but include earnings in gross income with potential ten percent early withdrawal penalty under IRC Section 72(t).

The SECURE 2.0 Act eliminated lifetime RMDs from designated Roth accounts effective for tax years beginning after December 31, 2023 — aligning the Roth 401(k) with the Roth IRA for lifetime distribution purposes.

Employer matching contributions may now be directed to the designated Roth account under SECURE 2.0 if the plan permits and the contributions are fully vested, though availability depends on whether the employer’s plan has adopted the option.

Designated Roth account balances may be rolled to a Roth IRA or to a new employer’s designated Roth account without current tax.

On a rollover to another employer’s designated Roth account the five-year period for the receiving account is measured from the earlier of the originating or receiving account’s first Roth contribution year; on a rollover to a Roth IRA the designated Roth years do not carry over and the Roth IRA’s own five-year period governs.