Employees or surviving spouses may want to consider the benefits of an in-plan conversion from a 401(k), 403(b) or governmental 457(b) to a Roth account. They can do this within an existing plan without rolling over funds into a Roth IRA. Or, a plan participant can take a distribution which is then rolled over to a designated Roth account within 60 days. The conversion can be any amount of available funds, and is combined with participant’s income for gross income tax purposes. If the conversion includes a loan balance, the loan amount is counted as income. Employer securities are taxed according to fair market value. While conversion will require payment of taxes in the present, future earnings and qualified distributions are tax-free.
Because the funds are, in essence, changing locations, your plan document must allow for an in-service withdrawal for employees. If not currently permitted, you may need to amend your plan document for in-plan Roth rollovers. Another administrative task needed is to update your 402(f) notice to include language about the in-plan Roth accounts. The notice must be provided to participants who request a distribution that is eligible for rollover.
I’ll write more about this next week, but you can find complete details of the IRS ruling in Notice 2010-84.