Guidance On In-Plan Roth Rollovers Released
For employees of organizations that offer Roth 401(k)’s, guidance was issued this week to clarify the treatment and availability of the option to rollover traditional pre-tax 401(k) balances to the Roth post-tax 401(k).
This option was first codified with the passage of American Taxpayer Relief Act of 2012 (this being the last-minute act passed January 1, 2013 that caused problems with tax return filing season this past year).
The guidance contained in IRS Notice 2013-74 explains the mechanical process of rolling balances over between the pre and post tax varieties of 401(k)’s. It addresses everything from what types of plan balances can be rolled over (such as earnings, vested and non-vested portions etc), the plan amendments necessary to allow for rollovers, top-heavy testing, and tax withholding considerations. Read more from the Journal of Accountancy here.
This guidance will be very helpful to plan administrators in implementing such rollovers. Keep in mind that if you make a rollover from a traditional deferred 401(k) to a Roth 401(k), that amount rolled over will be subject to income tax in the year the funds are moved. The option of spreading the rollover over two tax years that applied for rollovers occuring in 2010 no longer applies, thus the entire amount will be taxable in one year and usually requires tax planning to ensure that underpayment penalties are avoided.
