Thursday, March 14, 2013

In-plan Roth Conversions:

A Low-cost Enhancement with Significant Tax Advantages

In-plan Roth 401(k), 403(b), and governmental 457(b) conversions were originally established by the Small Business Jobs Act of 2010. However, under this law, employees have been unable to convert account balances to a Roth inside the retirement plan without a distributable event (i.e., age 59½, termination, death or disability).

Now, they can.

One of the lesser publicized new provisions of the American Taxpayer Relief Act of 2012 (the “fiscal cliff” bill) removes the distributable event requirement and expands the opportunity to convert all or part of a pre-tax account balance to a Roth (distributions from a Roth account are free of income tax if certain minimum requirements are met). The conversion can occur any time, in any amount, and is applicable to 401(k), 403(b), and governmental 457(b) plans that currently offer a Roth contribution feature.

Although very new and without any clear guidance yet from the Internal Revenue Service, this feature affords you the opportunity to review your plan features to determine if adding it is beneficial. For retirement plan sponsors that do not currently offer a Roth contribution feature, you can now add both these options to your plan.

While Roth conversions may not be for everyone, they may present interesting possibilities for a wide range of employees. Too often, when saving for retirement, employees overlook tax planning strategies that might provide greater value for their savings when they begin taking distributions.

If you have any questions regarding this new feature or adding a Roth contribution feature to your plan, please get in touch by calling (855) 882-9177 or e-mail us at

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