inplan-roth-conversions | American Funds

News & Announcements

In-Plan Roth Conversions Update

January 24, 2014

In January 2013, Congress extended existing, limited in-plan Roth conversion rules to provide that pre-tax elective deferrals, matching and other employer contributions (including safe harbor), whether or not immediately distributable, can be converted to Roth amounts. On December 11, 2013, the IRS issued long-awaited guidance addressing the expanded conversion rules.

The new guidance clarifies that amounts must be vested to be eligible for conversion. Further, amounts rolled over into a designated Roth account within the same plan remain subject to the same distribution restrictions that applied prior to the rollover. For example, pre-tax deferrals or safe harbor contributions can only be distributed after the participant reaches age 59 ½, or in the case of deferrals, when a participant has a financial hardship; those same rules will attach to the in-plan Roth rollover, requiring separate tracking of different money types. Plans may limit in-plan Roth conversions to specific money types.

The guidance also provides that in-plan Roth conversions of amounts that are not eligible for immediate distribution may be accomplished only by direct rollover; a section 402(f) notice is not required in this situation; and there is no withholding under Code section 3405 in this situation (and no voluntary withholding under Code section 3402(p)). The 402(f) notice is required when the conversion includes amounts that are eligible for distribution.

Plan amendments are not required for 401(k) plans until the later of December 31, 2014 or the last day of the plan year in which the option becomes available. 403(b)s may have a longer amendment period, depending on when the IRS issues opinion letters for pre-approved 403(b) plans. Safe harbor plans may adopt mid-year in-plan Roth conversion amendments at any time before December 31, 2014.

We are currently reviewing our system capabilities to see how we can support in-plan Roth rollovers in our programs.