In-plan Roth Rollover Conversion Guidance
Posted 2-16-2011 | By Christine Bentson | Download Article
In-plan Roth Rollover conversions, introduced through the Small Business Jobs Act of 2010, provide the opportunity for rollovers from a 401(k) or 403(b) to a Roth 401(k) or Roth 403(b). However, the opportunity is not available unless the qualified plan has a designated Roth contribution account option in the plan. Technically, qualified plans must be amended to provide this opportunity as a first step.
Once the plan is amended, there are certain rules that apply. The IRS issued guidance in November 2010 (Notice 2010-84) to clarify the rules. Below are a few highlights:
- The Roth rollover may be accomplished by a direct rollover, or a distribution to the individual who rolls it back into the plan within 60 days (indirect rollover).
- The amounts able to be converted are only amounts that are distribution eligible. Individuals need to check with their plan administrator to see if their accounts in the plan are distribution eligible. Many qualified retirement plans restrict distributions. If you currently are not eligible for a rollover to a Roth IRA due to plan restrictions, you are likely not eligible for an in-plan Roth rollover.
- The amount(s) converted are taxable income. Once converted if they are withdrawn for any reason other than a "qualified distribution," the amount is subject to penalties.
- In-plan Roth direct rollovers are not subject to the 20% mandatory federal income tax withholding on eligible rollover distributions; however indirect in-plan Roth rollovers are subject to this withholding requirement.
- Unlike rollovers to Roth IRAs, the in-plan Roth rollover cannot be reversed, once converted the conversion is irrevocable.
- The in-plan Roth rollover is only available for those meeting the mentioned requirements and are participants, spousal beneficiaries or alternate payees.
Individuals should check with their employer to determine if the in-plan Roth rollover opportunity exists in their employer's qualified retirement plan. Additionally, individuals should talk to their personal tax accountant to determine tax consequences of conducting an in-plan Roth rollover. Employers may receive questions regarding this new option and at a minimum should talk with their plan administrator to determine if this option is a good fit for their plan.
Please contact Christine Bentson, CPA, RPA, CEBS, with any questions at cbentson@hlbtr.com.