Wednesday, December 1, 2010

In-Plan Roth Rollover Guidance Released

IRS has released guidance on the conversion of 401(k) and 403(b) plan assets to Roth 401(k) or Roth 403(b) accounts in Notice 2010-84. This guidance also applies to governmental 457(b) plans beginning January 1, 2011. Here are the highlights:

  • Plan participants, spouses, and alternate payees who are current or former spouses can do the in-plan Roth conversion.
  • The funds converted must be eligible for rollover from the plan.
  • The conversion is not treated as a distribution in the case of a plan loan being converted and spousal consent is not needed.
  • In-plan rollovers are not subject to the 10% early distribution penalty and direct rollovers are not subject to 20% mandatory withholding.
  • If the conversion is done in 2010 the participant can spread the income over 2011 and 2012 or elect to include all the income on their 2010 tax return.
  • All in-plan Roth conversions must make the same tax election - either the two-year spread or to include the income on the 2010 tax return. The election is made on Form 8606.
  • There is NO option to recharacterize an in-plan Roth conversion.
By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2010 Ed Slott and Company, LLC


Jim said...

Thanks for the post. Regarding the 2nd to last point, are you talking about all participants in a plan choosing to do a Roth conversion must make the same tax election or does this apply to one participant who makes more than one conversion over a couple years?
Also, is there any indication about the tax elections for spreading income applying in 2011 and forward?