Plan sponsors have been waiting for details on rollovers within retirement plans to designated after-tax Roth accounts, and on Dec. 11, IRS issued new guidance that may prove beneficial.
Among the clarifications and changes in Notice 2013-74 was an extension of the deadline for amending plans to incorporate in-plan Roth accounts.
Now plans have until Dec. 31, 2014, or the last day of the first plan year in which the amendment is effective, to include this option.
This elective conversion option for 401(k) participants wishing to avoid paying likely higher taxes later on their retirement assets was expanded at the start of 2013 through a provision of the American Taxpayer Relief Act of 2012. The new notice, which contains 11 questions and answers, spelled out which types of contributions and earnings on them may be rolled over into an in-plan Roth account:
- elective deferrals in 401(k) and 403(b) plans;
- matching contributions;
- non-elective contributions; and
- annual deferrals made to governmental 457(b) plans.
As of Jan. 1, 2013, when the ATRA changes took effect, amounts eligible for rollover to in-plan Roth accounts included those otherwise not distributable, and tax withholding no longer applied. But they remain subject to distribution restrictions already in place, such as attainment of age 59½ by a participant. There is no income limitation on conversion amounts.
An in-plan Roth rollover is treated as a distribution for determining eligibility for tax rules on net unrealized appreciation in employer securities paid out as a lump sum, the notice said.
A participant making an in-plan Roth rollover may need to increase his or her tax withholding or make estimated tax payments to avoid an underpayment penalty, the notice said. A plan may limit the type of contributions eligible for in-plan Roth conversions and the frequency of such rollovers.
The conversion option ATRA brought about gives workers able to pay tax upfront on their retirement savings several new opportunities, including the chance for younger workers to shield at least some of their earnings from taxes as their income grows, and the possibility to use pretax and Roth amounts to balance and trim the tax burden they will face at retirement.
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