Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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 The employer cannot make matching (or any other) contributions to a DRAC. The employer’s matching contribution (if any), and any other employer contributions to the plan on behalf of the participant, must be made to the participant’s “traditional” CODA account, regardless of whether the participant’s contribution that is being “matched” was made to a traditional account or to a DRAC.  Money cannot be rolled from a Roth IRA into a DRAC, even if that Roth IRA contains nothing but money rolled into it from the same or another DRAC. Reg. § 1.408A-10 , A-5. Elective deferrals may be contributed prospectively only to a DRAC. Once the participant has elected to have his deferral contribution sent to a traditional 401(k) account, he cannot later move the funds from the traditional account into a DRAC. Reg. § 1.401(k)-1(f)(1)(i) . The only exception to that statement is, once he becomes entitled to a distribution from the traditional elective deferral account, he can roll such distribution from that account to a DRAC if permitted by the plan (see ¶ 5.7.11 ). A DRAC (unlike a Roth IRA) is part of a 401(k), 403(b), or governmental 457(b) plan. As such it is subject to all the same rules that apply to traditional accounts in such plans, except to the extent § 402A provides otherwise. For example, DRACs are subject to the same lifetime and post-death minimum distribution rules as other plan benefits. Reg. § 1.401(k)-1(f)(3) . A DRAC owner approaching age 70½ should consider rolling over his DRAC to a Roth IRA to avoid “lifetime” required distributions; see ¶ 5.2.02 (A), ¶ 5.7.08 , ¶ 5.7.09 . DRAC distributions are subject to the income tax withholding rules applicable to other distributions from qualified plans; see ¶ 2.3. DRACs are also subject to federally granted spousal rights (see ¶ 3.4 ), and the rules restricting distributions from elective deferral accounts (not covered in this book; see, instead, Chapter 27 of The Pension Answer Book ( Appendix C ). Roth IRAs are subject to none of these. Other differences include the irrevocability of contributions ( ¶ 5.7.02 (C)), the definition of qualified distributions ( ¶ 5.7.04 ), the treatment of nonqualified distributions ( ¶ 5.7.05 ), and the rollover rules ( ¶ 5.7.06 – ¶ 5.7.09 ). As with a Roth IRA, there are two types of distributions from a DRAC, qualified distributions and other (nonqualified) distributions. Qualified distributions from a DRAC, like qualified distributions from a Roth IRA, are income tax-free. § 402A(d)(1) ; Reg. § 1.402A-1 , A- 2(a). However, the definition of qualified distribution is different for the two types of Roth plan. Each involves a five-year waiting period and a triggering event, but the computation of the Five- Year Period, and the triggering events, are not the same. A. Qualified distribution triggering events. A DRAC distribution is a qualified distribution only if it is either (1) made on or after the date the participant reaches age 59½, (2) made after his death, or (3) attributable to the participant’s being disabled “within the meaning of section 72(m)(7).” An additional category of qualified distribution from a Roth IRA, the DRACs: Definition of “qualified distribution” RMDs and other contrasts with Roth IRAs