Tax & Accounting Blog

New rules for Roth account conversions in retirement plans

1099, Information Reporting for Wealth Management, ONESOURCE, Tax Information Reporting, Trust Tax January 7, 2013

BoatsThe new American Taxpayer Relief Act, signed by the President on January 2, includes a change for Roth individual retirement accounts in employer plans.  The Act provides that, effective for transfers made after December 31, 2012, in taxable years ending after December 31, 2012, a broader range of amounts in employer-sponsored tax-deferred retirement plans may be transferred to a designated Roth account without the transfer being treated as a distribution subject to the early-withdrawal penalty.

Prior to this, a deferral plan under section 401(k) (including the Thrift Savings Plan), 403(b) or 457(b) governmental plan could include Roth accounts, but participants could only convert pre-tax account amounts to the Roth with respect to money they had a right to take out of the plan, usually because of being eligible for distribution after age 59 and one-half, or in a rollover after separating from service.

Now, a plan will be able to permit any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The amount converted will be subject to regular income tax.  I.R.C. section 402(a)(c)(4) is amended as follows, with a new subsection (E):

“(E) Special Rule for Certain Transfers. – In the case of an applicable retirement plan which includes a qualified Roth contribution program:

(i) the plan 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 benefit of the individual,

(ii) such transfer shall be treated as a distribution to which this paragraph applies which was contributed in a qualified rollover contribution (within the meaning of section 408(A)(e)) to such account, and

(iii) the plan shall not be treated as violating the provisions of section 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), or 457(d)(1)(A), or of section 8433 of title 5, United States Code, solely by reason of such transfer.”

Plans that want to offer this option will need to amend the plan to include it.