New ROTH Conversion Rules

Almost buried in the recently enacted American Taxpayer Relief Act of 2012 is a pension provision that removes many of the limitations on making a qualified rollover from a qualified plan to a designated Roth account in an “in-plan Roth rollover.”

As you are aware, the major difference between  the Roth provisions and the traditional tax deferral, is generally that a Roth account pays tax on contributions but no tax at the time of distributions (as with all tax code – subject to specific situations).  A traditional plan does not pay tax on the amounts contributed but pays tax on the amounts distributed.

The concept of the law was simple, if your plan had both a traditional and Roth provision, you could rollover amounts from the traditional accounts to the Roth accounts and pay tax at that time.  However, the original law only allowed this conversion if the traditional amounts were “eligible rollover” amounts under the plan.

The 2012 Taxpayer Relief Act provides that an applicable retirement plan that includes a qualified Roth contribution program may allow an individual to elect to have the plan transfer any amount not otherwise distributable under the plan to a designated Roth account maintained for the individual’s benefit. The transfer is treated as an in-plan Roth rollover, which was contributed in a qualified rollover contribution to the designated Roth account.

Pending further guidance, it appears that amounts that do not otherwise meet the Code-based requirements for being a qualified rollover distribution may be deemed to be qualified rollover distributions when rolled over to a designated Roth account in an in-plan Roth rollover.

Since the 2012 Taxpayer Relief Act does not limit the phrase “any amount not otherwise distributable” to 401(k) elective deferrals, it appears that a plan can elect to apply the new in-plan Roth rollover provisions not only to 401(k) elective deferral accounts, but also to any employer contribution accounts (e.g., matching contribution accounts and/or profit sharing contribution accounts), rollover accounts, and employee after-tax contribution accounts. IRS should clarify this in future guidance.

We will keep you posted as we get more guidance, but for the time being it looks we can transfer between these accounts as we see fit.  If you have any questions regarding how this new law effects your specific situation, please do not hesitate to contact us.

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