Fiscal Cliff Legislation Expands In-Plan Roth Conversions

The deal struck in late 2012 to avoid the so-called “fiscal cliff” (the American Taxpayer Relief Act of 2012) included a provision that expands the options for in-plan Roth conversions by introducing the concept of in-plan Roth transfers.   Previously, the only type of Roth conversions available within a plan were Roth rollovers.  That meant that any amount intended to be converted to Roth contributions had to be distributable as a rollover-eligible distribution.  Unfortunately, many employees could not take full advantage of this feature because they could not convert 401(k) deferrals until they had reached age 59-1/2.  Under the new law the rollover-eligible distribution restriction does not apply and therefore all amounts can be converted to Roth.

The new in-plan Roth transfer option is available to any 401(k) plan, 403(b) plan, or governmental 457(b) plan which accepts Roth deferrals.  While the change is effective immediately, a plan will have to be amended to take advantage of this new feature.  Further guidance is expected from the IRS later this year that will clarify some of the more technical aspects of implementing this feature as well as the amendment procedure.