The difference between a designated Roth account and a Roth IRA
In USA, if you meet certain conditions, you can get a special type of retirement plan. This retirement plan is named Roth IRA – Roth, after Senator William Roth, and IRA is short for Individual Retirement Account.
What’s the difference between a designated Roth account and a Roth IRA?
According to the IRS the top ten differences are:
1. Regarding the number of investment choices, a Roth IRA offers you many choices – as long as not prohibited – while a designated Roth account is limited to the offer of your plan;
2. Anyone with earned income can participate in a Roth IRA while in a designated Roth account you must be a participant in a §401(k), §403(b) or §457 governmental plan that allows designated Roth contributions;
3. Contribution limits are the 3rd big difference between the two retirement plans. The Roth IRA has a contribution limit of $5,000 or $6,000, if you are 50 years old or older, while the designated one has a limit of $16,500 or $22,000 (if you are 50+);
4. Recharacterization of rolled over amounts is allowed in Roth but not allowed in designated accounts;
5. The minimum distributions requirement appears only after the original IRA owner’s death with a Roth plan;
6. With a IRA Roth plan, nonqualified distributions are distributed in this order: nontaxable contributions first and taxable earnings second. With a designated Roth account nonqualified distributions are pro-rated between Roth contributions (nontaxable) and earnings (taxable);
7. Regarding withdrawals, if you have a Roth IRA you can withdraw at any time. With a designated Roth you can withdraw only when allowed by the terms of the plan. It is good to know that, depending on distribution, both are subject to tax;
8. A Roth IRA does not offer you a loan while a designated one might offer you if your plan allows it;
9. With a Roth IRA a 5-year holding period for qualified distribution begins January 1 of the year a contribution is made to any Roth IRA while in the case of a designated Roth the 5 year holding period begins January 1 of the year a contribution is made to any Roth IRA;
10. With a Roth IRA you can name anyone as beneficiary while in the case of a designated Roth, if you are married, your spouse must consent to any non-spouse beneficiary.
For additional information, see “IRA Resources” at www.irs.gov/retirement