A qualified distribution from a designated Roth account is excludable from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made:
- On or after attainment of age 59½,
- On account of the employee’s disability, or
- On or after the employee’s death.
A distribution that is not a qualified distribution will be partially included in gross income if there are earnings in the account.
- The distribution will be treated as coming pro-rata from earnings and contributions (basis).
- The 10% tax on early withdrawals may apply to the part of the distribution that is includible in gross income.
Required minimum distributions
Designated Roth accounts are subject to the required minimum distribution rules. A participant must begin taking annual distributions from the account by the later of age 72 (70 ½ if they reach 70 ½ before January 1, 2020) or retirement, except certain owners must begin distributions at age 72 (70 ½ if they reach 70 ½ before January 1, 2020).
Rollovers of designated Roth account distributions
An eligible rollover distribution from a designated Roth account may be rolled over to:
- another designated Roth account, or
- a Roth IRA.
Distributions from designated Roth accounts may not be rolled over to another account in a plan or to a traditional IRA.
A qualified distribution may be rolled over to another designated Roth account only in a direct rollover.
A partial rollover of a nonqualified distribution is treated as consisting first of the untaxed portion of the distribution.
Example: Joe receives a $14,000 eligible rollover distribution that is not a qualified distribution from his designated Roth account. The distribution consists of $11,000 of Joe’s own contributions to the account (his investment, which has already been taxed) and $3,000 of earnings on the account (which has not been taxed). Within 60 days of receipt, Joe rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of earnings and $4,000 of his contributions. Because only the portion of the distribution that would be includible in income is rolled over, none of the distribution is taxable to Joe.