In-plan Roth conversions expanded

The American Taxpayer Relief Act of 2012 (the so-called “fiscal cliff” agreement) that the president signed on January 2, 2013, includes a provision that permits in-plan conversions (“in-plan Roth transfers”) of amounts from a non-Roth account to a Roth account in certain defined contribution plans. Previously, in-plan Roth conversions were limited to amounts that were distributable, such as those that are due to attainment of age 59-1/2 (“in-plan Roth rollovers”). The new law allows 401(k), 403(b), and governmental 457(b) plans to permit the conversion of all vested amounts to Roth accounts within the plan.

When a participant converts an amount from a non-Roth to a Roth account, the amount is taxable. However, the Roth account can be distributed tax-free later if the distribution meets certain requirements. Thus, an in-plan Roth conversion may be of interest to participants who could benefit by paying the taxes on their account sooner, rather than later.

Although further guidance from the IRS is expected on this provision of the new law, plan sponsors that are interested in offering the new Roth conversion feature can start implementing this optional provision immediately. Plans will need to be amended to permit the new Roth transfers (including plans that were previously amended to permit in-plan Roth rollovers under prior law). Unless the awaited IRS guidance provides an extension, an amendment to implement the new Roth conversion feature would have to be made by the last day of the plan year in which the amendment is effective (e.g., by December 31, 2013, for calendar-year plans that implement the new feature in 2013). In addition, plans must permit Roth contributions in order to allow Roth conversions.

For more information on this new Roth transfer provision, please contact your Milliman consultant.