(b)lines Ask the Experts – Difference Between Roth and After-Tax

Michael A. Webb, vice president, Cammack Retirement Group, answers:

Though Roth 403(b) contributions and after-tax 403(b) contributions are both made to a 403(b) plan out of an employee’s after-tax income, the similarities end there.

With a Roth 403(b) contribution, a qualified distribution is entirely excludable from federal income taxation; by contrast, with an after-tax account, earnings are taxed when distributed. After-tax contributions are subject to the same 401(m) Average Contribution Percentage (ACP) testing to which 403(b) matching contributions are subject; Roth 403(b) contributions are not subject to any special nondiscrimination rules.

It should be noted, however, that governmental entities such as public school districts are not subject to ACP testing, so the distinction is moot for such plan sponsors. Finally, Roth 403(b) contributions are subject to the 402(g) elective deferral limit, while after-tax contributions are not subject to that limit (though they are subject to the 415 limit on total annual additions).

In the Experts experience, after-tax contributions are very rare in 403(b) plans. By contrast, Roth 403(b) contributions have become increasingly popular. And, given the advantage of tax-free distributions from a Roth 403(b) account there is likely little use for after-tax contributions in a 403(b) plan if Roth 403(b) contributions are permitted.

As an aside, the IRS recently issued guidance regarding the rollover of after-tax amounts that provides additional options with respect to such transactions.  For details, click here and here.    

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