Designated Roth Account vs. Roth IRA: Key Differences Explained

Choosing between a Designated Roth Account (DRA) and a Roth IRA can have long-term financial implications, especially for retirement planning. While both offer tax-free qualified withdrawals, their rules differ in contribution limits, withdrawal flexibility, and required minimum distributions. Understanding these differences is essential for making informed decisions.

Though similar in tax benefits, DRAs and Roth IRAs operate under distinct regulations that dictate how they are funded, accessed, and taxed. Recognizing these distinctions can help optimize retirement strategies and prevent unexpected tax consequences.

How Each Account Is Held

A DRA is part of an employer-sponsored retirement plan, such as a 401(k), 403(b), or 457(b), and is administered by the employer. Investment options are limited to those provided by the plan, and access depends on employment status. Plan rules dictate aspects like loan availability and hardship withdrawals. If changing jobs, rollovers may be necessary to maintain tax advantages.

A Roth IRA, by contrast, is individually owned, giving the account holder full control over investment choices. This allows for a broader range of assets, including stocks, bonds, mutual funds, ETFs, and alternative investments, depending on the custodian. Unlike a DRA, which follows employer plan rules, a Roth IRA is managed through a financial institution of the account holder’s choosing, providing greater autonomy.

Contribution Parameters

A DRA follows the contribution limits for employer-sponsored plans. In 2024, participants can contribute up to $23,000 if under 50, with an additional $7,500 catch-up contribution for those 50 and older. These limits apply to all elective deferrals within the plan, including both traditional and Roth contributions. Contributions are made through payroll deductions and are subject to the employer’s plan rules, which may impose additional restrictions.

A Roth IRA has separate IRS-imposed limits. In 2024, individuals can contribute up to $7,000 annually, or $8,000 if they are 50 or older. However, eligibility is phased out based on modified adjusted gross income (MAGI). For single filers, the phase-out range begins at $146,000 and ends at $161,000, while for married couples filing jointly, it starts at $230,000 and ends at $240,000. Those exceeding these thresholds cannot contribute directly but may use a backdoor Roth IRA strategy, which involves contributing to a traditional IRA and converting it to a Roth.

Unlike DRAs, Roth IRAs allow contributions beyond employment income, as long as the individual has earned income for the year. This means self-employed individuals, freelancers, and those with side gigs can contribute without needing an employer-sponsored plan. Contributions are made with after-tax dollars and are not subject to payroll withholding, allowing for more flexibility in funding the account. Contributions can be made at any time before the tax filing deadline of the following year.

Distribution Protocols

Withdrawing funds from a DRA follows employer plan rules. Distributions are generally allowed after reaching age 59½, separation from service, disability, or death. Non-qualified withdrawals are subject to ordinary income tax on the earnings portion, plus a 10% early withdrawal penalty unless an exception applies.

The five-year rule applies differently between these accounts. For a DRA, the five-year holding period is tied to the specific employer plan. If funds are rolled over to a new employer’s Roth account, the clock may reset unless the receiving plan allows the original holding period to carry over. In contrast, a Roth IRA’s five-year period starts with the first contribution to any Roth IRA the account holder owns, regardless of custodian changes or rollovers.

Loans are another factor in accessing funds. Some employer plans allow loans from a DRA, typically up to the lesser of $50,000 or 50% of the vested balance, but repayment terms must be followed to avoid the loan being treated as a taxable distribution. Roth IRAs do not permit loans, but since contributions can be withdrawn at any time without tax or penalty, borrowing against the account is unnecessary.

RMD Requirements

Required Minimum Distributions (RMDs) highlight a key difference between DRAs and Roth IRAs. Under the SECURE 2.0 Act, which took effect in 2023, RMDs are no longer required from DRAs starting in 2024. Previously, account holders had to begin taking RMDs at age 73 (or 75 for those born in 1960 or later), even though qualified Roth distributions remained tax-free.

This change aligns DRAs more closely with Roth IRAs, which have never been subject to RMD rules during the account owner’s lifetime. It allows funds to continue compounding tax-free without mandatory withdrawals disrupting financial plans.

Tax Outcomes

Both DRAs and Roth IRAs allow for tax-free qualified withdrawals, but their tax treatment differs in key ways.

Employer contributions to a DRA are not made on an after-tax basis like employee contributions. Instead, any employer match is deposited into a traditional, pre-tax account, meaning those funds will be taxed upon withdrawal. This creates a split tax treatment within the same retirement plan, requiring careful planning to manage taxable and tax-free distributions. Additionally, DRAs follow the pro-rata rule for withdrawals, meaning distributions consist of both contributions and earnings proportionally, rather than allowing contributions to be withdrawn first.

Roth IRAs offer more favorable tax treatment for withdrawals. Since contributions are made with after-tax dollars, they can be withdrawn at any time without tax or penalty. Earnings, however, are tax-free only if the account has been open for at least five years and the account holder is 59½ or older. Unlike DRAs, Roth IRAs do not have employer contributions, eliminating concerns about pre-tax employer matches affecting future tax liabilities. This distinction is important for estate planning, as Roth IRAs allow for tax-free inheritance under certain conditions, whereas DRAs may require beneficiaries to navigate taxable distributions.

Rollover Procedures

Transferring funds between a DRA and a Roth IRA is a common strategy for consolidating retirement savings or gaining more control over investment choices. However, specific rules must be followed to avoid unintended tax consequences.

A rollover from a DRA to a Roth IRA is generally allowed after separating from an employer or if the plan permits in-service rollovers. When rolling over funds, the five-year holding period for the Roth IRA does not carry over from the DRA, meaning the clock resets unless the individual already has an existing Roth IRA with contributions made at least five years prior. This can impact those planning near-term withdrawals, as earnings withdrawn before meeting the five-year requirement could be taxed and penalized. Additionally, since employer contributions to a DRA are pre-tax, they must be rolled into a traditional IRA or another pre-tax account to avoid immediate taxation.

Moving funds in the opposite direction—from a Roth IRA to a DRA—is not allowed. Employer-sponsored plans do not accept rollovers from Roth IRAs, meaning once funds are in a Roth IRA, they cannot be transferred back into a workplace plan. This restriction affects individuals who want to consolidate retirement savings within an employer plan for creditor protection or simplified management. Those considering a rollover should evaluate timing, tax implications, and long-term financial goals before executing a transfer.