Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

277

compensation in cash or to have such amount contributed to a vested account for his benefit in a retirement plan. Needless to say, elective deferrals are subject to many complicated tax rules. Through 2005, the reward for successfully complying with these rules was that the amount of the elective deferral would be excluded from the participant’s income. The deferred salary (and earnings thereon) would not be taxed until they were later distributed to the participant or his beneficiaries (typically after retirement or death). Elective deferral contributions are treated as “wages” for purposes of the Federal Insurance Contributions Act (FICA). § 3121(a)(5)(C) , (D) , (H) , (v)(1)(A) . Since these contributions are subject to FICA taxes in any event, the employee’s decision to have his elective deferral paid into a CODA plan account (whether traditional or Roth), or to himself in cash, will have no effect on either the employee’s or the employer’s FICA tax obligations. Since 2006, the participant may have an additional option for his elective deferrals: Instead of deferring income tax on the deferred compensation, he can pay income tax on it currently and have it contributed to a designated Roth account (DRAC) within the plan; later qualified distributions from the DRAC will be tax-free. § 402A(d)(1) . The portion of the elective deferral that the participant elects to have contributed to a DRAC is called a “designated Roth contribution.” § 402A(a)(1) . Only “applicable retirement plans” are permitted to have DRACs. § 402A(a) . Through 2010, “applicable retirement plans” included qualified ( § 401(a) ) plans that have elective deferral (401(k)) provisions, and 403(b) plans, so DRACs are sometimes called “Roth 401(k)” or “Roth 403(b)” accounts. § 402A(e)(1) . Governmental 457(b) plans are permitted to have DRACs effective in 2011 and later years. § 402A(e)(1) . This book will refer only to 401(k) plans; unless specifically otherwise indicated the same rules apply to 403(b) and (after 2010) governmental 457(b) plans. Reg. § 1.403(b)-3(c)(1) . The rules discussed here apply, after 2005, to 401(k) and 403(b) plans and (after 2010) also to governmental 457(b) plans, all of which are collectively referred to here as “ CODA plans .” A. Who may contribute. Any participant in a CODA plan can elect to have all or part of his elective deferral go into a DRAC, if his employer’s plan permits designated Roth contributions (plans are not required to offer this option). A self-employed individual who has a self-employed (Keogh; ¶ 8.3.09 ) 401(k) plan can have all or part of his elective deferral contributed to a DRAC. In contrast to Roth IRAs ( ¶ 5.3.04 (C)), there is no income ceiling above which the participant is not allowed to make designated Roth contributions. § 402A . The DRAC was the first Roth retirement plan not to limit contributions to individuals with income below certain levels. There is no age limit above which the participant cannot contribute to a Roth 401(k). Traditional IRAs are the only plans that do not allow contributions after the participant has reached age 70½. DRAC contributions: Who, how much, how, etc.