From Thomson Reuters and Kleshinski, Morrison & Morris CPAs —

Dear Clients and Friends,

Many company retirement plans give employees the option of contributing to Designated Roth Accounts (DRAs) [also sometimes called Roth 401 (k) accounts]. If your company offers the DRA option, contributing  to a DRA is worth considering.

DRA Basics

When you make an elective contribution to a regular 401 (k) account, the contribution reduces your taxable salary. So, your federal income tax bill is reduced, and your state income tax bill too, if applicable.

In contrast, when you contribute to a ORA, your taxable salary is not reduced. You are taxed on the contribution as if it was included in your salary. The payoff is that earnings in your DRA are allowed to accumulate federal-income-tax-free and you can eventually take federal-income-tax-free qualified withdrawals from the account.

In general, a qualified withdrawal is one taken after your DRA has been open for more than five years and you are age 59½ or older. Also, qualified  withdrawals can include withdrawals after becoming disabled and withdrawals taken by an account beneficiary after you have died.

DRA Contribution Limits

For 2021, you can contribute up to $19,500 ($26,000 if you’ll be age 50 or older as of 12/31 /21) to a ORA, regardless of your level of income.

Your employer can make matching contributions, but any matching contributions must go into your regular 401 (k) account, and later withdrawals from that account will be taxable. That said, employer matching contributions are always good because they are “free money.”

The Two Most Important Factors to Consider When Evaluating the DRA Option

  1. The longer you hold funds in a DRA the better. Since you’re giving up an immediate deduction [that would be available if you contributed the funds to a regular 401 (k) plan] it takes a little while to accumulate enough potentially tax-free earnings to offset the loss of a current deduction. So, DRAs should be especially attractive to younger retirement savers.
  2. The higher the tax rate when the funds are withdrawn, the bigger the DRA advantage. For instance, if you are subject to a 24% federal income tax rate when you contribute to a DRA and expect to be in the 32% tax bracket in retirement, you’ll be even happier about taking future tax-free DRA withdrawals than if the tax rate remained the same.

Comparing DRA Contributions to Roth IRA Contributions

A Roth IRA works essentially the same way as a DRA. There is no deduction when you contribute to the Roth IRA. However, provided the requirements for a qualified distribution are met, withdrawals aren’t subject to federal income tax.

So, it’s possible for the earnings in the Roth IRA to be completely federal income tax-free, but there are limits on your ability to make annual Roth IRA contributions. For 2021, the maximum contribution is $6,000 ($7,000 if you will be age 50 or older as of 12/31/21 ). Also, for 2021, the ability to make a Roth IRA contribution is phased out once your Adjusted Gross Income (AGI) exceeds $125,000 if single ($198,000 if you’re a married joint-filer).

Your ability to contribute is completely phased once AGI reaches $140,000 if single or $208,000 if a married joint-filer.

DRAs (Designated Roth Accounts) are worth a look for high earners

As already mentioned, there is no income-based limit on your ability to make ORA contributions. For 2021, you can contribute up to $19,500 ($26,000 if you’ll be age 50 or older as of year-end). So, the ORA allows much larger contributions and is available if income is too high to contribute to a Roth IRA. Even better, if your income permits you to make Roth IRA contributions, you can still contribute to a ORA.

So, you can contribute up to $25,500 ($19,500 + $6,000) to the two accounts for 2021 [$33,000 ($26,000 + $7,000) if you will be 50 years or older by 12/31/2021]. On the other hand, you have complete control over your own Roth IRA. You don’t have complete control over a ORA. Your company plan will have limited investment options, and you generally can’t take money out of a ORA until you leave the company.

In-plan Rollovers into DRAs

If your company 401 (k) plan allows DRAs, it also may allow you to roll over funds from your regular 401 (k) account into a DRA. This is a so-called in-plan rollover and is the quickest way to get more money into a
DRA. But, you must understand that the amount you roll over will be taxed because it’s effectively treated the same as a Roth IRA conversion transaction.

Warning: If you withdraw rolled-over ORA funds within the five-year period starting on the first day of the year in which you did the rollover, you can get hit with a 10% early withdrawal penalty tax unless an exception applies. So, don’t do that!

DRA Balance Can Be Rolled into a Roth IRA

When you leave the company, you can roll over your DRA balance into a Roth IRA. Do that because you won’t have to take any annual required minimum withdrawals from the Roth IRA for as long as you live. You can keep earning that nice tax-free income and line yourself up for tax-free withdrawals after reaching age 59½ (if you’re not there already).

If you still have a balance in your Roth IRA when you pass away, whoever inherits the account can take tax-free withdrawals after meeting the rules for qualified withdrawals.


If your company plan gives you the DRA option, give it a hard look. This is especially good advice if: (1) the company plan matches DRA contributions, and/or (2) your income is too high to make annual Roth IRA contributions, and/or (3) you expect to pay higher tax rates in retirement than you’re paying now.

Additionally, you should consider making an in-plan rollover into a DRA if the company plan gives you that option. But, remember that there’s a tax cost for making an in-plan rollover. Contact us if you want an
analysis of the tax consequences of making an in-plan rollover.

Please contact us if you have any other questions about DRAs or want more information.

Kleshinski, Morrison & Morris CPAs

How to contact KM&M CPAs

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