Tag Archives: Roth rollover

What’s the additional guidance on in-plan Roth rollovers all about?

Tedesco-KaraOn December 11, 2013, the IRS issued additional guidance (Notice 2013-74) on in-plan Roth rollovers (also known as “conversions”). As background, the Small Business Jobs Act of 2010 (SBJA) allowed 401(k), 403(b), and governmental 457(b) retirement plans that permit Roth deferrals to offer participants (or their surviving spouses) an in-plan Roth conversion of distributable vested pretax accounts (e.g., because age 59-1/2 has been attained) into an after-tax Roth option within the same plan.

The American Taxpayer Relief Act of 2012 (ATRA) added a twist to the existing law by removing the requirement that the in-plan Roth rollover amount had to be eligible for distribution. Effective January 1, 2013, as long as the plan allows Roth elective deferrals and in-plan Roth rollovers under the expanded guidance, participants can take advantage of an in-plan Roth rollover of both vested distributable and otherwise non-distributable pretax amounts.

The additional IRS guidance clarifies the questions surrounding ATRA and in-plan Roth rollovers of otherwise non-distributable amounts. In-plan Roth rollovers are permitted within 401(k), 403(b), and governmental 457(b) plans, irrespective of any otherwise applicable in-service distribution restrictions based on contribution type or other conditions (such as age). The amount must be vested prior to rollover, must retain the same distribution restrictions that applied before the rollover, and, being a rollover, no mandatory or voluntary withholding applies even though the conversion is taxable in the year it occurs. Participants may want to increase their withholding on sources outside of the plan to pay for the taxes on the conversion of the pretax account.

Plans need to be amended to allow for in-plan Roth rollovers. The guidance states the plan amendment needs to be adopted by the later of the last day of the first plan year in which the amendment is effective, or December 31, 2014. A calendar year 401(k) or 457(b) governmental plan that began allowing in-plan Roth rollovers in 2013 or 2014 has to be amended by December 31, 2014. A yet-to-be determined extended amendment deadline applies to 403(b) plans (but not before 2015 according to the IRS).

The additional guidance also provides that the plan can limit the types of contributions eligible for in-plan Roth rollovers and the frequency of the rollovers, and it can be amended to discontinue allowing them. If a participant has never made a Roth contribution to the plan, but requests an in-plan Roth rollover, the rollover is considered a Roth contribution and starts the participant’s five-taxable-year holding period for converted amounts and related earnings to be ultimately distributed from the plan tax-free (subject to certain other conditions).

The additional guidance should help plan sponsors decide whether to allow for the expanded in-plan Roth rollovers. Now that there is increased potential for a participant to convert his or her vested pretax account to after-tax dollars and pay the associated taxes now to save on taxes in retirement, plan sponsors may want to consider adding this feature to their retirement plan.

For more perspective on this new guidance, click here.

Guidance issued on in-plan Roth rollovers to designated Roth accounts

The Internal Revenue Service (IRS) has issued Notice 2013-74, providing guidance on the expanded types of amounts eligible for in-plan Roth rollovers within 401(k), 403(b), or 457(b) governmental retirement plans. These amounts, which became eligible for in-plan Roth rollover treatment in 2013 under the 2012 American Taxpayer Relief Act, include sums that are otherwise not distributable to participants under the terms of the plan, such as elective deferrals, matching contributions and nonelective contributions, and annual deferrals made to 457(b) governmental plans.

The IRS’s new guidance also includes deadlines for adopting plan amendments to provide for these in-plan Roth rollovers of such otherwise nondistributable amounts, as well as rules applicable to all in-plan Roth rollovers.

For more perspective on this new guidance, read this Client Action Bulletin.

American Taxpayer Relief Act of 2012, fiscal cliff legislation, and in-plan Roth conversions

Effective January 1, 2013, the recently negotiated and signed American Taxpayer Relief Act of 2012 includes provisions for in-plan Roth conversions. The new provision is akin to the in-plan Roth rollover, with the difference being that the provision is applicable for amounts that are not currently eligible for distribution. The legislation benefits plan sponsors and participants but it also provides a revenue stream for the federal government.

Roth contributions to a qualified 401(k) or 403(b) plan or to a governmental 457(b) plan are made on an after-tax basis. This means participants pay taxes on contributions now, not later. Before the new rules, if a plan permitted an in-plan Roth “rollover,” then a participant could move money from a non-Roth plan account (pretax salary deferrals, employer match, employer nonelective contributions) to the Roth account within the same plan. Participants were only allowed to do this if they had distributable events (i.e., distribution at age 59½, severance from employment) and the amount was eligible for rollover. Under the new law, if a plan permits an in-plan Roth “conversion,” then a participant may move money from a non-Roth plan account to the Roth account within the same plan, without having a distributable event.

If participants decide to take advantage of an in-plan Roth conversion, they will pay income taxes at their current tax rates. The conversion is not subject to mandatory or optional withholding, nor to the early 10% penalty tax, although a recapture rule may apply a 10% penalty if in-plan Roth amounts are distributed within a five-year period. This means the participant needs to think about the following: Is my tax bracket at retirement going to be higher than it is now and do I have the money outside of my plan assets to cover the taxes?

If participants expect to remain in the same tax bracket for the remainder of their working careers, there is no advantage to paying the tax now. However, for participants who believe they will be in higher brackets as they go through their working careers and in retirement, and have other money available to cover the income tax, then conversion of a non-Roth account may be beneficial. The converted amount would be considered tax-free, as are the future earnings on it, if certain requirements are met, including a five-year holding period. If the participant will cross multiple tax brackets, it may be beneficial to spread the Roth conversions over multiple years. This helps the participant accumulate resources to pay the taxes and makes the conversion more affordable.

There are additional questions and considerations the participant needs to address, such as when to retire, whether to work after retirement, how much money will be needed in retirement, whether estate taxes must be paid, and how much Social Security provides. These are not easy questions to answer, but taxes and taxable income may impact the answers. Most participants want to maintain a standard of living in retirement that is not less than what they currently have. Considering after-tax investment vehicles, such as a Roth account, may help participants achieve their financial retirement goals.

IRS issues new guidance on Roth rollovers

New guidance out today:

The IRS has issued Notice 2010-84 providing guidance under § 402A(c)(4) of the Internal Revenue Code, relating to rollovers from § 401(k) plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”), as added by § 2112 of the Small Business Jobs Act of 2010 (“SBJA”), P.L. 111-240. The guidance in this notice also generally applies to rollovers from § 403(b) plans to designated Roth accounts in the same plan.

The guidance, in the form of 20 questions and answers, discusses what amounts are eligible for in-plan rollovers, plan loans, tax consequences of an in-plan rollover and specific issues regarding plan amendments.

Find the full guidance here. You might also find this useful.