Tax Relief Bill Brings Changes To In-Plan Roth Conversions

by Stella LeBlanc
(Benefits Update, No. 1, February 2013)

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law, thus ending (for now at least) the crisis created by the so-called “fiscal cliff.”  One of the law’s provisions offers more flexibility for retirement planning for participants in 401(k), 403(b) and 457(b) plans.   

Prior to the new Act, in-plan Roth conversions were available only with respect to amounts under a plan that were otherwise eligible for distribution, meaning a participant had to be otherwise eligible for a plan distribution (such as over age 59 ½) in order to make an in-plan Roth conversion.  The new law expands the in-plan Roth conversion provisions to include any vested amount under the Plan, whether or not the participant is otherwise eligible for a plan distribution.   

Here’s a summary of the more important aspects of the Act: 

Plans eligible for the in-plan Roth transfers: 

All 401(k), 403(b) and 457(b) plans.  But the plans must have adopted a provision to permit Roth contributions and Roth conversions.  This new provision is optional, not mandatory. 

Participants eligible to make such transfers:

All participants with an account under the plan, including former participants, beneficiaries, and alternate payees.

Amounts eligible for conversion: 

All vested amounts under the plan, including deferral contributions, matching contributions, non-elective (profit sharing) contributions, and any after-tax contributions. Any earnings accrued under such accounts may also be converted.  All in-plan Roth conversions are irrevocable once made.

Tax on amounts converted: 

All taxable portions of the conversion are subject to federal and state income tax as if actually distributed and will be reported on a 1099-R in the year converted.

Tax advantages of Roth conversions: 

Amounts converted are taxable at current income tax rates and if a later distribution is a qualified distribution from the Roth account, earnings accruing after the conversion are also distributed tax-free.  A qualified distribution from a Roth account is one made after five years following the conversion or after the attainment of age 59 1/2.