What’s the Difference Between a Roth IRA and a Designated Roth Account?

Thinking about a Roth IRA or a Roth 401k for retirement? 

They may seem similar, but there are key differences that often get overlooked. Understanding contribution limits, income eligibility, investment options, distribution rules, and required minimum distributions (RMDs) could make a big difference in your 2025 tax planning. 

This article breaks down the major differences to help you decide which account fits best based on your income, access to retirement plans, and long-term goals.

📌 Also Read: Roth IRA Conversions: Definition, How it Works, Eligibility Rules

Understanding Roth IRA and Designated Roth Accounts

Let’s start with a brief overview of each account type.

What Is a Roth IRA?

A Roth IRA is an individual retirement account funded with after-tax dollars. To qualify, you need earned income and must fall within IRS income limits. Contributions may grow tax-free, and distributions that meet IRS criteria may also be tax-free. Roth IRAs generally do not require withdrawals during the owner’s lifetime.

Eligibility Criteria and Features (2025)

✅ Must have earned income equal to or greater than your contribution

✅ MAGI phase-out range for single filers: $150,000–$165,000

✅ MAGI phase-out range for married filing jointly: $236,000–$246,000

✅ Contribution limit is $7,000, or $8,000 if age 50+

✅ Qualified withdrawals: account open at least five years and owners generally age 59½+

✅ No required minimum distributions during the owner’s lifetime

What Is a Designated Roth Account?

A Designated Roth Account is part of an employer-sponsored retirement plan (such as a Roth 401k or Roth 403b). You can only use one if your employer offers it.

There’s no income limit to participate. You can contribute up to the yearly limit set by the IRS, and your money can grow tax-free. Withdrawals can also be tax-free if you meet the IRS conditions. 

Unlike a Roth IRA, though, required minimum distributions (RMDs) may apply—unless you roll the money into a Roth IRA later. Your investment choices and rules for things like withdrawals or rollovers depend on your specific plan.

Key Points (2025)

✅ Must participate in an eligible employer plan; no MAGI limit

✅ Employee elective-deferral limit: $23,500

✅ Standard catch-up (age 50 +): $7,500

✅ Special SECURE 2.0 catch-up for ages 60-63: $11,250 (if the plan adopts it)

✅ Qualified withdrawal rules mirror Roth IRA five-year and age 59½ tests

✅ No lifetime RMDs for the account owner starting in 2024 (per SECURE 2.0)

✅ Investment options vary by employer plan

📌 Also Read: IRS | 401k Increases to $23,500, IRA Limit Remains at $7,000

Roth IRA vs Designated Roth Account – Key Differences

Roth IRA and Designated Roth Accounts both offer the potential for tax-free growth, but the way they work under the hood can be surprisingly different. Here’s a quick side-by-side comparison to help you see where the two accounts split:

Difference	Roth IRA	Designated Roth Account (e.g., Roth 401k)
Contribution limits	$7,000 under age 50; $8,000 at age 50+	$23,500 under age 50; $7,500 catch-up at age 50+; $11,250 catch-up for ages 60–63
Income eligibility	Phases out at $150,000–$165,000 (single) or $236,000–$246,000 (joint)	No income limits, but must be offered by your employer plan
Investment menu	Access to almost any asset allowed by the IRA custodian	Limited to the investment options inside your workplace plan
Employer match	Not available	Match may be offered, but goes into a pre-tax account and is taxed later
5-year holding period	One 5-year clock across all Roth IRAs	Each plan starts its own 5-year clock; rollover timing matters
Required minimum distributions (RMDs)	No lifetime RMDs	No RMDs starting in 2024 (SECURE 2.0 change)
Beneficiary rules	No spousal consent required	May require spousal consent to name a non-spouse beneficiary

Source: IRS | Ten differences between a Roth IRA and a designated Roth account

Contribution Limits & Income Eligibility

The amount you’re allowed to contribute—and whether you qualify to contribute at all—differs between these two accounts.

✅ Roth IRA (2025):

✅ Designated Roth Account:

📝 Note: Your ability to max out either one usually depends on how much earned income you have and the type of business structure you operate under (sole prop, S corp, etc.).

Investment Choices & Plan Restrictions

What you’re allowed to invest in can also vary quite a bit.

✅ Roth IRA: You generally have access to almost any investment type that your custodian supports like stocks, ETFs, mutual funds, and in some cases, private funds.

✅ Designated Roth Account: Your investment menu is limited to what your employer’s plan offers. This could be a solid selection or fairly narrow, depending on the plan.

Employer Match & Tax Implications

This is one of the key structural differences between the two.

✅ Roth IRA: Doesn’t include an employer match.

✅ Designated Roth Account: If your plan includes matching, those matched dollars typically go into a pre-tax account—not your Roth. That means the match is taxed when withdrawn later, even if your Roth portion grows tax-free.

5-Year Holding Period & Withdrawals

The five-year clock is often misunderstood but plays a big role in determining when your withdrawals may be qualified.

✅ Roth IRA: The clock starts on January 1 of the year you make your first contribution. All Roth IRAs share this single clock. To take a qualified distribution, you’ll generally need to be age 59 ½ and have passed that five-year mark.

✅ Designated Roth Account: Each plan tracks its own 5-year clock, based on the first year you contributed to that plan. If you roll over your designated Roth into a Roth IRA, the clock might reset (or it might not) depending on whether your existing Roth IRA has already satisfied the 5-year requirement.

Required Minimum Distributions (RMDs)

Thanks to SECURE 2.0, the rules around RMDs have changed.

✅ Roth IRA: No RMDs required during your lifetime.

✅ Designated Roth Account: As of 2024, these accounts are also free from RMDs while you’re alive. That wasn’t always the case, but this recent update brings them in line with Roth IRAs.

📝 Note: If you’re concerned about future RMD changes or plan-specific rules, rolling funds to a Roth IRA is one way to maintain control.

📌 Also Read: IRS | SECURE 2.0 Act changes affect how businesses complete Forms W-2

Beneficiary & Inheritance Rules

Who inherits your account (and how) can look different between the two.

✅ Roth IRA: You can name any beneficiary without needing spousal consent. After death, beneficiaries generally follow a 10-year rule (unless they’re considered eligible designated beneficiaries, like a spouse or disabled child).

✅ Designated Roth Account: Some plans require written spousal consent if you name someone other than your spouse as beneficiary. Inherited Roths in workplace plans may also have different payout timelines, depending on plan rules and federal guidelines.

Roth Rollovers, Conversions, and Strategies

You don’t have to choose one—many people use both accounts strategically. But getting the most out of each one means understanding the rules around rollovers, conversions, and contribution planning. Here’s how to approach it.

Rolling a Designated Roth Account Into a Roth IRA

If you’re leaving your job or retiring, you may have the option to move your designated Roth balance into a Roth IRA. This can help you avoid required minimum distributions later on. But there are a few things to keep in mind:

✅ Choose a direct rollover. A trustee-to-trustee transfer is the safest way to move the funds. It helps you avoid the 60-day deadline and skips the 20 percent withholding that comes with taking a check.

✅ Check your plan’s rules. Not every employer plan allows in-service withdrawals. If you’re still working, ask if the rollover is even an option.

✅ Understand how the 5-year rule works.

📌 Also Read: IRS | Publication 590-B

✅ Keep detailed records. Note the rollover date, the amount moved, and when your Roth IRA was first opened. These dates matter later.

Backdoor and Mega-Backdoor Roth Strategies

If your income is too high to contribute directly to a Roth IRA, there are still ways to get money in. These two strategies involve a few extra steps, but they’re commonly used:

✅ Backdoor Roth IRA

A Backdoor Roth IRA is a way for high earners to get money into a Roth IRA. It involves contributing to a traditional IRA and then converting it to a Roth, which may create a tax bill.

✏️ Hypothetical Example: You make a nondeductible contribution to a traditional IRA (within IRS limits), then convert it to a Roth IRA shortly after. If you don’t have other traditional IRAs, the conversion is usually tax-free.

✅ Mega-Backdoor Roth

This works only if your plan allows after-tax contributions and in-service rollovers or in-plan Roth conversions.

📝 Don’t forget the paperwork. Use Form 8606 for Roth IRA conversions, and check your Form 1099-R and Form 5498 for accuracy at tax time.

Planning Contributions Based on Your Tax Outlook

If you qualify to contribute to both a Roth IRA and a designated Roth account, you may not need to pick just one. But how you split contributions could depend on your income and tax forecast.

✅ Start with what you’re eligible for.

📌 Also Read: Contributions to Individual Retirement Arrangements (IRAs) 

✅ Match contributions to your tax bracket.

✅ Check the totals. Make sure you’re not going over the combined limits across accounts. It’s easy to lose track if you’re contributing to both.

Mistakes to Watch Out For

Even small mistakes could lead to penalties or unintended taxes. Here are a few common mistakes to avoid:

✅ Not tracking your 5-year periods. Every Roth IRA conversion starts its own 5-year clock for early withdrawal penalties, even if you’re past the main Roth IRA 5-year rule.

✅ Missing the 60-day deadline. If you take a distribution and don’t redeposit it within 60 days, it’s likely taxable and may be subject to penalties.

✅ Assuming all plans allow Roth conversions. Some Solo 401k plans don’t permit after-tax contributions or in-plan Roth conversions. Always read your plan documents first.

✅ Mixing up contribution types. Pre-tax, after-tax, and Roth contributions should always be clearly labeled. Don’t rely on memory—check your payroll or contribution records.

Roth IRA vs Designated Roth Account – Key Takeaways

Understanding the difference between a Roth IRA and a designated Roth account could help you make more informed choices about where and how to save. Each account follows its own set of rules on contributions, income eligibility, withdrawals, and rollovers—and in some cases, using both may offer more flexibility.

If you’re deciding between the two, it generally helps to review your income, plan access, and expected tax bracket over time. Checking your plan documents and confirming eligibility each year may also prevent issues down the line.

📌 Want to learn more? Explore our other articles on Roth strategies, Solo 401k options, and long-term retirement planning:

---

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

To access investment advisory services through Carry Advisors, you must be a client of Vibes on an eligible membership plan. For more information about Carry Advisors’ investment advisory services, please see our Form [ADV Part 2A] (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=916200) brochure and [Form CRS] (https://reports.adviserinfo.sec.gov/crs/crs_323620.pdf) or through the SEC’s website at [www.adviserinfo.sec.gov] (http://www.adviserinfo.sec.gov/).