The Internal Revenue Service anticipates issuing guidance this year on expanded Roth options for defined-contribution plans contained in the American Tax Relief Law, which was signed by President Barack 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 591/2 or had severed from employment,” according to the IRS website.
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 [pretax] elective deferral account when the individual is not eligible for a distribution from that account,” according to the website.
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,” according to a recent report by the Transamerica Center for Retirement Services.
Previously, “only amounts eligible for distribution and for rollover, such as in-service withdrawals of elective contributions after age 591/2, 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 states that “a conversion will not be treated as having violated Internal Revenue Code sections ... pertaining to limitations on distributions,” the report said.
Among the similarities be-tween the old and new laws, the Transamerica report said:
• An in-plan Roth conversion feature is discretionary; employers aren't 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 continuing Roth contributions and allow conversions.
• Participants who make a conversion are subject to ordinary income tax on the amount converted, but aren't subject to the 10% early distribution tax.
• Conversions aren't subject to mandatory or optional withholding. However, since the conversion amount is subject to ordinary income tax, participants should consider increasing their withholding or making estimated tax payments outside the plan to avoid any underpayment penalties.
Robert Steyer is a reporter for sister publication Pensions & Investments.