Roth Contribution Option
IU’s supplemental retirement plans allow you to make pre-tax contributions, Roth (after-tax) contributions, or any combination of the two. When you make traditional contributions to these plans, you fund the account with pre-tax dollars then pay taxes on withdrawals in the future. The Roth option allows you to contribute with after-tax dollars, then take qualified withdrawals tax-free. Roth contributions are not the same thing as a Roth IRA, but may provide additional options for your retirement savings strategy.
Keep in mind that the annual IRS contribution limit for each plan includes your pre-tax and Roth contributions combined.
How to Make Roth Contributions
You can change the type and amount of your supplemental retirement plan contributions at any time by following one of the two options below.
- Search for and select the Employee Center task in One.IU
- Complete two-step login using your IU username/passphrase and Duo
- Click on the Benefit Details tile
- Click the Optional Benefit Changes tile
- Click the green Start Optional Benefit Change button
- Read the information on the Welcome screen. To progress through the OBC process, click the yellow Next button in the upper right-hand corner of the screen.
- Verify your personal information, payroll direct deposit and tax withholding details, and emergency contact, and make updates if needed. Click Next to proceed to the next step.
- Click the Start My Enrollment button. On the next screen, click the gray Select button next to the event.
- Under the ‘Benefit Plans’ heading, find and select the plan you wish to change – Roth TDA or Roth 457(b).
- Under ‘Contributions’ enter a flat-dollar amount or percentage of your pay that you would like to contribute each pay period.
- Click Done in the upper right-hand corner to continue.
- If you wish to change your contributions to other plans, repeat steps 9 – 11.
- Once you have made all of your elections, review your elections by selecting the Enrollment Preview Statement button under the ‘Enrollment Summary’ heading. Click the X in the upper right-hand corner of the screen to exit the preview.
- When you are finished, click the green Submit Enrollment button under the ‘Enrollment Summary’ heading.
- A confirmation message will appear on the screen once your elections have been submitted successfully. Additionally, an e-mail confirming your submission will be sent to your IU email address within one business day. If you do not receive an email, your changes were not submitted properly.
- To review your submission at any time, log in to the Employee Center, select the Benefit Details tile, then the Benefits Statement tile.
Paper Form Instructions
Complete and submit a paper SDA to IU Human Resources:
Remember, the after-tax Roth option does not increase the annual contribution limits for the plans. It just means that you may designate some or all of your contributions to these plans as after-tax Roth. It is your responsibility to ensure you do not exceed these limits between your pre-tax and after-tax contributions.
Frequently Asked Questions
Are Roth contributions the same as a Roth IRA?
No. Making after-tax Roth contributions to an IU supplemental retirement plan is not the same as a Roth IRA.
A key difference is that Roth IRAs restrict participation based on your income level. With Roth contributions to the TDA or 457(b) plans, there is no income restriction and you are able to contribute up to the IRS annual contribution limit into each plan, each year.
What is an advantage of making Roth contributions to the IU supplemental retirement plans versus a Roth IRA?
The IU supplemental retirement plans allow you to potentially contribute significantly more each year than you could to an IRA. For example, you can enroll in both IU supplemental retirement plans (the IU TDA and the IU 457(b) plan), and contribute up to the IRS annual limit into each plan, each year. For 2023, the limit is $22,500 per plan ($30,000 for those age 50 and older). IRAs only allow you to contribute up to $6,500 per year ($7,500 if age 50 and older).
Do I need to create a new Fidelity NetBenefits account for my Roth contributions?
No. If you already make tax-deferred contributions to an IU supplemental retirement plan, you are not issued a new account with Fidelity if you decide to make after-tax Roth contributions. Any Roth contributions you make go into your existing account and are tracked separately from your tax-deferred amounts.
How do Roth contributions affect my take home pay?
Roth contributions reduce your take-home pay more than if you made an equivalent tax-deferred contribution. This is because Roth contributions are subject to income taxes when deducted from your paycheck.
What are the conditions for a tax-free distribution of Roth contributions (a “qualified” withdrawal)?
In general, the following conditions must be met to make a qualified tax-free and penalty-free withdrawal of Roth contributions and earnings:
- The account must have been established for at least five years (this is known as the five-year “holding period”); and
- The withdrawal must be taken at or after age 59½, or as a result of disability or death.
Distributions that don’t meet these conditions are considered non-qualified and may be subject to taxes and penalties.
When does the five-year holding period begin?
The five-year holding period begins on January 1 of the year you make your first Roth contribution. Even if you make your first Roth contribution in December, you will still receive credit for the year. It’s important to note that you don’t have to make contributions for five consecutive years—your first contribution simply “starts the clock” on the five-year holding period.
What if a distribution of Roth contributions doesn’t meet the conditions of a qualified withdrawal?
Distributions that do not meet the conditions of a qualified withdrawal are considered non-qualified, therefore are treated as a prorated return of Roth contributions and earnings.
- The portion of the distribution that represents earnings is subject to ordinary income tax and possibly a 10% penalty for early distributions.
- The portion of the distribution that represents a return of Roth contributions is not subject to taxation.
In terms of contribution dollars only, I thought I could take distributions from Roth accounts tax-free and penalty-free at any time and without a holding period. Is this not the case?
For Roth IRAs, the portion of a distribution that represents a return of contributions can be withdrawn tax-free and penalty-free at any time, and at any age. The five-year holding period and age 59½ rule only apply to the portion of a distribution that represents earnings.
For employer plans (such as IU’s supplemental retirement plans), the portion of a distribution that represents a return of Roth contributions is subject to the in-service withdrawal rules of the plan. However, for former employees, Roth contributions can be withdrawn tax-free and penalty-free at any time and at any age. The five-year holding period and age 59½ rule only apply to the portion of a distribution that represents earnings.
Can I convert Roth contributions to pre-tax contributions?
No. Once you elect to make a Roth contribution, it is irrevocable. You can change future contributions to tax-deferred, but once the election has been made to designate a contribution as after-tax Roth you cannot change it to tax-deferred retroactively.
Can I convert pre-tax contributions to Roth contributions?
Yes. An in-plan conversion of pre-tax contributions to Roth is allowed. You should set up an appointment with a Fidelity Workplace Financial Consultant to learn about your options and to request the conversion. You can schedule an appointment using the online scheduling tool or by calling 800-642-7131.
Do I have to take required minimum distributions from my Roth account(s)?
Yes. Accumulated Roth balances are subject to RMD rules.
Are after-tax Roth contributions right for me?
Below are some general statements that may help you decide if Roth contributions are right for you. Because everyone’s tax situation is unique, it is recommended that you speak to an investment advisor or a Fidelity Workplace Financial Consultant before making any significant changes to your retirement savings.
You might benefit from Roth contributions if you:
- Want qualified tax-free distributions in retirement.
- Cannot have a Roth IRA due to IRS income restrictions, but want a pool of tax-free money to draw from in retirement.
- Want to pass on assets tax-free to heirs.
- Have a long retirement horizon that will allow time to accumulate tax-free earnings
You might benefit from tax-deferred contributions if you:
- Want to lower your current taxes.
- Are close to retirement, expect to start taking distributions, and don’t have several years to wait for compounding of Roth contribution earnings to make up for the tax liability paid when Roth contributions are deducted from your paycheck.
- Don’t think you will meet the criteria for Roth distributions to be tax-free (for example, if the account won’t be open for at least 5 years and you won’t be at least age 59½ or disabled or deceased when a distribution is taken, then the earnings will not be tax-free).
Download Fidelity’s Roth Option Flyer for additional information and considerations.