The Internal Revenue Service “anticipates issuing guidance later this year” on expanded Roth options for defined contribution plans contained in the American Tax Relief Law signed by President Obama on Jan. 2.
Prior to the new law, participants could make an in-plan conversion of “only amounts the individual could have had distributed from the plan, usually because the individual had attained age 59½ or had severed from employment,” the IRS website says.
The new law allows DC plans to “permit this type of rollover for an amount that is not eligible for distribution at the time of the rollover, such as an amount in an individual's regular (pre-tax) elective deferral account when the individual is not eligible for a distribution from that account,” the website says.
According to a recent report by the Transamerica Center for Retirement Services, the new law means that “in-plan Roth conversions may be made from any non-Roth vested account, without requiring that the amount being converted must be eligible for distribution and rollover from the plan.”
Previously, “only amounts eligible for distribution and for rollover, such as in-service withdrawals of elective contributions after age 59½, in-service withdrawals of employer contributions after a stated age and/or stated period of time, and distributions due to disability, severance of employment, or retirement were eligible for conversion,” the Transamerica report said.
In addition, the new law says “a conversion will not be treated as having violated Internal Revenue Code sections ... pertaining to limitations on distributions,” the report said.
Among the similarities between the old and new laws, the Transamerica report said:
“An in-plan Roth conversion feature is discretionary; employers are not required to amend their plans to allow for conversions.”
“To allow in-plan Roth conversions, a 401(k), 403(b), or governmental 457(b) plan must permit on-going Roth contributions and allow conversions.”
“Participants who make a conversion are subject to ordinary income tax on the amount converted, but are not subject to the 10% early distribution tax.”
“Conversions are not subject to mandatory or optional withholding. However, since the conversion amount is subject to ordinary income tax, the participant should consider increasing their withholding or making estimated tax payments outside the plan to avoid any underpayment penalties.”
The Transamerica report can be found at www.transamericacenter.org/resources/TCRS2013- 01.pdf. — ROBERT STEYER
