MNDCP Roth Q&A

Pre-Tax contributions are deducted from pay before federal and state taxes. Taxes are due on both the contributions and associated earnings when distributions are taken from a 457(b) account.

Roth after-tax contributions are deducted from pay after federal and state taxes are withheld (subject to all applicable wage-withholding requirements). Both the Roth contributions and any associated earnings are entirely tax-free on qualified distributions from a 457(b) account.

Yes. Employees can designate some or their entire contribution amount as a Roth after-tax contribution (which is included in gross income) and/or the traditional pre-tax contribution.

Example:
Mary contributes $100 per paycheck to her MNDCP 457(b) account. She may designate $50 as a pre-tax contribution and $50 as a Roth after-tax contribution.

Only if an employee does not already have a MNDCP account

Employees who already have a MNDCP account and wish to contribute Roth after-tax dollar must notify MSRS of their MNDCP contribution election, just as they currently do today with their pre-tax contribution elections.

When an employee adds or changes their contribution amount (either pre-tax or Roth after-tax), MSRS communicates changes to designated employer payroll contacts via a Deferral Rate Feedback Report. 

The Deferral Rate Feedback Report should be used by designated employer payroll contacts to update their payroll deduction system as soon as administratively possible.  All changes in the Report are meant to be effective immediately. Employers will have access to only the report that includes their own employees.

Designated employer payroll contacts will receive an email notification whenever a new Deferral Rate Feedback Report is available. However, sometimes the email notification is blocked by network firewalls or identified as SPAM. We encourage employers to log into the Empower Plan Service Center (PSC) website to view and download any weekly Deferral Rate Feedback Reports.

The report should be downloaded on a weekly basis to ensure that employee initiated changes to MNDCP contribution rates become effective within the next available payroll period.

The maximum amount an employee can contribute to a 457(b) plan account in any one year, including both pre-tax contributions and Roth after-tax contributions, is limited under Code §457(e)(15).

The limit for 2024 is $23,000 ($30,500 if over age 50). The special three-year catch-up provision¹ limit for 2024 is $46,000.
 

¹The catch-up provision may not be used at the same time as the age 50 and over contribution limit.

According to federal regulations, a MNDCP Roth account cannot accept matching contributions; therefore, employer matching contributions must be deposited as a pre-tax contribution. Roth contributions can be included in a matching formula but actual matching contributions must be deposited in the employee's MNDCP pre-tax account.

When an employee designates a salary deferral as a Roth after-tax contribution, the employer must include that amount in the employee's gross income at the time the employee would have otherwise received the amount in cash. It is subject to all applicable wage-withholding requirements.

Please confirm with your Accounting or Finance Department the proper tax reporting for Roth contributions to a designated 457(b) plan. While MSRS is unable to provide advice, the following information is cited from the IRS 2023 Instructions for Forms W-2 and W-3.

Page 9 Designated Roth contributions

"Under section 402A, a participant in a section 401(k) plan, under a 403(b) salary reduction agreement, or in a governmental 457(b) plan that includes a qualified Roth contribution program may elect to make designated Roth contributions to the plan or program in lieu of elective deferrals. Designated Roth contributions are subject to federal income tax withholding and social security and Medicare taxes (and railroad retirement taxes, if applicable) and must be reported in boxes 1, 3, and 5. (Use box 14 if railroad retirement taxes apply)."

"Section 402A requires separate reporting of the yearly designated Roth contributions. Designated Roth contributions to 401(k) plans will be reported using code AA in box 12; designated Roth contributions under 403(b) salary reduction agreements will be reported using code BB in box 12; and designated Roth contributions under a governmental section 457(b) plan will be reported using Code EE in box 12."  For reporting instructions, see Code AA, Code BB, and Code EE starting on page 21

Page 21 Code EE Designated Roth contributions under a governmental section 457(b) plan

"Use this code to report designated Roth contributions under a governmental section 457(b) plan. Do not use this code to report elective deferrals under code G."

No.  Roth contributions are irrevocable. Employees can change their choice for future contributions but cannot transfer Roth after-tax balances to pre-tax.

Individuals are eligible to contribute the maximum amount to a Roth IRA if their Modified Adjusted Gross Income is $146,000 or less for single tax filers or $230,000 or less for married (filing jointly) tax filers. The Roth IRA annual contribution limit in 2024 is $7,000 plus an additional $1,000 if age 50 or older.

The Roth 457(b) allows all employees to contribute more because the annual contribution limit is higher and there are no income limits to qualify for participation. The annual contribution limit for combined pre-tax and Roth after-tax contributions to a 457 account in 2024 is $23,000 ($30,500 if age 50 or older). The special three-year catch-up provision¹ limit for 2024 is $46,000.

^{1The catch-up provision may not be used at the same time as the age 50 and over contribution limit.}

Yes, assuming they qualify for a Roth IRA (based on income limits).

Participation in an employer sponsored retirement plan (457(b), 403(b), 401(k), etc.) does not limit the contribution amount to a Roth IRA. An employee could contribute the maximum amount to a Roth 457 plan and, if eligible, to a Roth IRA.

They remain fully vested in their Roth IRA account and invested in whatever investment options (e.g.,  stocks or bonds, mutual funds, certificates of deposit, annuity contracts) the trustee or IRA administrator has made available.

A qualified Roth 457 distribution permits tax-free distributions of an employee's after-tax Roth contributions and all associated earnings. Accordingly, the distribution amount is not included in the employee's gross income.  A qualified Roth distribution must meet the following criteria:

• An employee's Roth 457 contribution (which includes Roth amounts rolled over) must have remained invested for at least a 5-taxable-year period. The 5-taxable-year period of participation begins on the first day of the employee's taxable year in which the employee made an initial Roth contribution to their 457 plan account. It ends when five consecutive taxable years have passed.

AND  is either made:

• after attainment of age 59½, or

• on account of the employee's disability.

Any distribution taken from a Roth 457 before the end of the 5-taxable-year period or prior to age 59½ is a nonqualified Roth distribution, negating the tax-free benefit of the associated earnings.

The earnings portion of the nonqualified Roth distribution will be reported as a taxable distribution; however, the contribution portion of the nonqualified Roth distribution will not be reported as taxable.

Employees may request a distribution at any age 30 days after they leave employment; provided such distributions are permitted under Internal Revenue Code Section 457 (e.g., retirement, resignation, permanent disability, or termination).

However, if the distribution is taken from a Roth source prior to age 59½ it will be reported as a nonqualified Roth distribution and, therefore, any associated earnings on the Roth source will be reported as taxable income.

The 10% IRS early distribution penalty does not apply to any pre-tax contributions or after-tax Roth contributions distributed from a 457 plan account.

At this time, only pre-tax amounts that are "eligible for a rollover distribution" may be converted to Roth after-tax amounts within the plan.

The following types of distributions are not eligible for rollover and may not be converted to an Roth after-tax source:

• Required Minimum Distribution payments

• Unforeseeable Emergency withdrawals

• Payments spread over long periods 

• (e.g., life expectancy payments or payments that will last for 10 or more years)

• Distributions of excess contributions

For some individuals, it may make sense to pay taxes on contributions now, rather than when money is withdrawn. Here are some examples:

• If an individual expects their income, marginal tax rate or both to rise substantially over time, they may be taxed at a lower rate today than at the time a distribution is taken. So the Roth option may be their best choice, especially if they are younger or currently in a relatively low tax bracket.

• At the other end of the spectrum, the Roth option may appeal to current high-income earners who expect to continue to pay a high tax rate into retirement. This group may more easily afford to make the maximum annual contribution and pay the taxes today in exchange for tax-free income in retirement.

• If an individual is in too high a tax bracket to qualify for a Roth IRA, the Roth 457 gives them the same tax-free withdrawal benefits without any income restrictions, such as those in a Roth IRA.

The decision to contribute pre-tax vs Roth after-tax will be based on factors one cannot predict for certain, including future income, changing tax rates, and anticipated investment returns. Ultimately, an individual's decision depends on their view of these factors and whether they want to and are able to pay taxes on retirement plan contributions now rather than later.

Employees should discuss these types of tax considerations with a qualified tax advisor before making a decision. MSRS Representatives are not able to advise employees on their decision.