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"Fiscal Cliff" Tax Compromise Will Allow 401k Intra-Plan Roth Conversions


The "fiscal cliff" tax compromise just passed by Congress expands the opportunity to convert pre-tax savings in a 401k plan into Roth savings. The new rule, shown below, will allow 401k participants to complete intra-plan Roth conversions.



(a) In General.--Section 402A(c)(4) is amended by adding at the end the following:

"(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 408A(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."

(b) Effective Date --The amendment made by this section shall apply to transfers after December 31, 2012, in taxable years ending after such date.


Some Additional Resources

A New Roth Conversion Opportunity

Abstract: The American Taxpayer Relief Act (H.R. 8) passed by the U.S. House of Representatives and the Senate contains an important provision that offers a new opportunity to convert assets in defined contribution plans (such as Section 401k plans), Section 403(b) plans, and governmental 457(b) plans into Roth accounts within the plan. This paper outlines the basic features of the new conversion right.

Roth 401k Conversions for All Thanks to Fiscal Cliff Deal

Abstract: To raise $12 billion to help pay for the two-month delay of sequester, the fiscal cliff deal allows money in a pre-tax 401k account to be converted into a Roth 401k account. Many employers will likely want to add this feature to their retirement plans as an added employee benefit, and many employees will likely want to do conversions. "This is a big deal," says Alison Borland, vice president of retirement solutions and strategies for Aon Hewitt.

No-Strings-Attached Roth 401k Conversion Is Good Deal -- for Select Few

Abstract: Until now, to make such a distribution without incurring a 10 percent penalty, workers must either have been retiring, terminating their job with their employer or turning 59½. But under the new law, employees can move their traditional 401k to a Roth version of the account without those events and without the penalty. However, advisers noted that Congress's decision is a win only for a narrow group of individuals.

Survey Reveals More Employers Likely to Add DC Roth Features in 2013

Abstract: A new survey by Aon Hewitt reveals an increasing number of U.S. employers are planning to add Roth features to their defined contribution plans in 2013. This comes on the heels of new legislation that makes it easier for DC investors to convert balances within their savings plan into Roth accounts.

Rick Meigs, President, 401khelpcenter.com, LLC

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