Roth 457 FAQs
What is the Roth 457 option?
The Roth 457 option for governmental deferred compensation plans was authorized by Congress effective January 1, 2011. A Roth 457 is not a Roth IRA. Neither is a Roth 457 a separate plan; it is simply a way for employees to control the taxation of their deferred wages when they are disbursed in the future. This option allows employees to elect after tax salary deferrals into a Roth option. Roth elective deferrals are accounted for separately from the pre-tax contributions made to the plan. Distributions from the Roth 457 are tax free if the contributions have been in the Roth elective deferral account for at least 5 years and the participant is at least 59 ½.
Who should consider the Roth 457 option?
For some employees, it might make sense to pay taxes on the DCP contributions now, rather than when money is withdrawn at retirement. Employees who would benefit are:
- Employees who expect either their pay or tax rate to increase substantially over time. Being taxed at a lower rate today may be a better option.
- Employees who expect to have relatively higher plan account investment earnings or to otherwise end up with a higher amount of money set aside for retirement, may benefit from paying taxes up front or just having a pool of tax-free money to draw on in the future.
- Younger employees who have a longer retirement horizon and more time to accumulate tax-free earnings under a Roth 457.
- Older employees who may want to leave tax-free money to their heirs in the future.
- Employees may want the option of not taking required withdrawals at age 70 ½ by rolling their Roth 457 to a Roth IRA.
The Roth 457 option gives employees more flexibility to save for retirement and provides control over when contributions, and retirement income, will be subject to federal income tax.
Can employees contribute to both pre-tax and Roth 457 post-tax basis at the same time?
Yes, but the Roth 457 contributions count towards the IRS limitations on deferred compensation contributions. Roth 457 contributions can either replace or complement traditional pre-tax contributions subject to the IRS limits of $18,000 per year (2015) plus an additional $6,000 in 2015 if the employee is age 50 or older at the end of the year.
Once contributions are made to the Roth 457, can they be moved to the pre-tax account?
No. There can be no mixing of the two types of contributions.
Does this affect an employee's ability to contribute to a Roth IRA?
No. Contributions to a Roth 457 have no effect on contributions to a Roth IRA.
Is there a special fund the Roth 457 contributions are invested?
No. Employees may invest Roth 457 contributions in any of the present fund options available in the Alaska Deferred Compensation Plan.
Are there special withdrawal options for the Roth 457 contributions?
No. The disbursement options remain the same for Roth 457 contributions. Earnings on the Roth 457 contributions will not be subject to taxation, however, if the employee is at least age 59 ½ and has held the Roth 457 account for 5 years or more.
How is the 5-year period of participation calculated?
The 5-year period of participation begins on the first day of your taxable year for which you first made designated Roth contributions to the plan. It ends when five consecutive taxable years have passed.
Does the DCP offer an in-plan Roth 457 rollover?
An in-plan Roth rollover is a rollover from your pre-tax contributions in DCP to the post-tax Roth 457 option. At this time the plan does not allow for this type of rollover.
A Roth IRA has income restrictions. Do these restrictions apply to the Roth 457?
No, there are no limits on your income in determining if you can make designated Roth 457 contributions. Of course, you have to have sufficient salary from which to make the deferral, and you are subject to the IRS limit on the amount of contributions per year.
Can I make a designated Roth contribution for my spouse if my spouse has no earned income as permitted with a spousal IRA account?
No, you cannot contribute to a governmental Roth 457 for your spouse.
Can I make age-50 catch-up contributions to the Roth 457 option?
Yes, provided you are age 50 or older by the end of the year.
Can I roll my Roth IRA into this new Roth 457 option?
No. The IRS does not allow this type of rollever. Please see the IRS rollover chart for details.
Are the contributions in my Roth 457 option subject to the IRS required minimum distribution (RMD) rules?
Yes. Designated Roth accounts are subject to the RMD rules. A participant must begin taking annual distributions from the account by either age 70 ½ or retirement, whichever is later.