Friday, June 3, 2011

In-Plan Roth Conversions Under Tax Extenders Legislation(2)

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An amendment to a pending Senate bill to extend expiring tax cuts (H.R. 4213) would allow Roth conversions in §401(k), §403(b) and eligible governmental §457 deferred compensation plans that have Roth accounts. (Another amendment to the extenders bill would allow Roth accounts within §457 plans, which are not provided for under existing law.)

Thus, plan participants could take advantage of the Roth conversion rules while maintaining the convenience and advantages of holding savings in an employer-sponsored retirement program, i.e., making a conversion to a Roth account without leaving the employer plan. However, the investment choices available in a Roth IRA would likely be considerably wider than those available within an employer plan.

A change in the tax Code that took effect this year permits individuals making more than $100,000 a year or married individuals filing separate returns to make Roth conversions, so if the amendment becomes law, it will open up in-plan Roth conversions to participants with sizeable account balances. Of course, the decision to make a Roth conversion can be a complex one, involving, among other considerations, trying to predict future income tax rates and whether the taxpayer should pay the tax due on the conversion from funds other than the account being converted.

Given all of the above factors, can the legislation be expected to generate substantially more Roth conversion activity if it passes?

For further discussion of designated Roth contributions to §401(k) plans, see 358 T.M., Cash or Deferred Arrangements, V.C.

--Mark C. Wolf, Editor (Compensation Planning)

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