Home > Employee Benefits > Roth conversions allowed for 401(k) and 403(b) plan participants

Roth conversions allowed for 401(k) and 403(b) plan participants

RothOne of the provisions included in the American Taxpayer Relief Act of 2012 (aka the Fiscal Cliff bill) impacts Roth 401(k) accounts held inside qualified plans. Under the new law, participants in a Qualified Retirement Plan that allows Roth (after-tax) contributions will be allowed to convert traditional (tax-deferred) contributions to the Roth account, regardless of their age or eligibility for a distribution. Individuals will have the option to make the Roth conversion for all or any part of the traditional (pre-tax) amount held in 401(k) plans, 403(b) plans and governmental 457(b) plans that allow Roth contributions.

While these conversions are subject to ordinary income tax for the year in which the conversion is made, participants will not have to pay the 10% early distribution tax (usually applicable to withdrawals before age 59.5). Basically, the new rule will let you convert any money in your traditional tax-deferred account, any earnings, and any employer matching money or profit-sharing money to the Roth after-tax account. Participants who choose to make in-plan Roth conversions under the new rule should be aware that they will be subject to Federal income tax on the amount converted and they will not be able to receive a distribution from the plan to help pay those taxes, unless they are eligible for a distributable event (e.g. age 59.5).

The new Roth conversion option may appeal to individuals who expect to pay higher taxes in the future, such as younger employees or employees in lower-tax brackets. Conversely, moving money from the traditional tax-deferred account to the Roth after-tax account probably doesn’t make sense if you think you’ll be in a lower tax bracket when you retire and start withdrawing money from your 401(k) account.

There are still some unanswered questions and unresolved administrative issues pertaining to the law. For example, will the Service Provider charge a fee to amend a Plan to allow this conversion? Plan sponsors and participants will have to wait for more guidance from regulatory agencies, their Plan Service Provider, or their Plan Advisor before implementing the new in-plan Roth conversion provision.

About the Author

Rob Swails is a Vice President at WGA and a Qualified Retirement Plan (401k) expert within the Employee Benefits Group.

617.646.0376 | RSwails@wgains.com |Connect with Rob on LinkedIn


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