In-Plan Roth Conversions

The Small Business Jobs Act of 2010 includes provision IRC §402A(c)(4), which allows a qualifying individual to convert 401(k), 403(b) and 457(b) accounts to a Roth account in the same plan. The provision also allows an individual to amend his or her plan to create an updated distribution option exclusively for in-plan Roth conversions (IPRCs).

IPRCs have a number of eligibility qualifications. The taxpayer must be fifty-nine and half years old or older and be disabled, have died, or have separated from service to qualify. The amount in question must be vested, and the plan must have a qualified Roth contribution plan in place at the time of the conversion.

The conversion must meet Code requirements and be eligible for section 402(c)(4)’s rollover distribution. The plan’s governing rules must also allow a distribution for rollover reasons. Additionally, required minimum distributions, corrective distributions of excess deferrals, deemed distributions, dividends from employer securities, and hardship distributions are not eligible under an IPRC.

The taxable amount of an IPRC is the fair market value of the distribution. This amount includes net unrealized appreciation less any basis in the distribution from after-tax contributions.

For more information on IPRC plans, see Peter Melcher, In-Plan Roth Conversions: Planning and Administrative Considerations, J. of Accountancy, May 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.