What is a Roth conversion in the plan?

Due to the Small Business Credit and Jobs Act of 2010 (HR 5297; Pub. L. No. 111-240), enacted by President Obama on September 27, 2010, many people want to know what a plan is. Roth conversion it is. This new provision makes it possible for any employer-sponsored plan, which includes a qualified Roth contribution program, to make this new feature available.

Employees participating in an employer-sponsored retirement savings plan can now elect to roll over any eligible rollover distribution of non-Roth amounts to an individual Roth account within the same plan.

Before this law was enacted, participants could only make a Roth conversion by rolling their distribution entirely out of their employer-sponsored plan and then into a separate Roth IRA.

Current or former participants are eligible to exercise this option, along with the participants’ surviving spouses. However, non-spousal beneficiaries of participants are excluded from this option.

Eligible participants can choose to do a Roth conversion on the plan, either directly or within 60 days. Of course, the conversion is taxable, but without the usual 10% early withdrawal penalty. And for tax year 2010, applicable taxes can be paid in two equal installments … one in 2011 and the other in 2012.

Additionally, beginning in 2010, the income limits that used to apply to Roth conversions were removed.

As with any new law affecting companies and their employees, frequently asked questions arise. These are some of the most common questions.

What types of plans are included in the Roth conversion in the plan?

Section 401 (k) plans, 403 (b) plans and, as of 2011, government 457 (b) plans. The provision does not apply to money purchase pension plans, profit sharing plans or defined benefit plans (for example, traditional or cash balance plans). You can add a Roth feature to a 401 (k) (or 403 (b)) plan now, but it can’t be limited to Roth conversions.

Are companies offering employer sponsored plans required to offer this feature?

Currently, plan sponsors are not required to offer this new feature. In fact, there may have been a lot of hesitation to make it available in 2010 due to all the administrative and employee relations hurdles that need to be overcome before this feature can be successfully implemented.

Is there a limit to the amounts eligible for conversion?

Any contributions that were acquired, along with any income, would be considered eligible for conversion. These include: (1) pre-tax 401 (k) and 403 (b) deferrals (as of 2011, 457 (b) government deferrals) and your earnings, (2) matching contributions and your earnings, (3) earnings share contributions and their earnings, and (4) after-tax contributions and their earnings.

Are there any distributions that are not eligible for conversion?

Distributions that are excluded from a Roth conversion include hardship distributions, minimum required distribution (RMD) payments, lifetime payments, installment payments of 10 years or more, certain remedial distributions, etc.

How will a Roth conversion be reported to the IRS?

A Roth conversion will be reported on Form 1099-R similar to a direct rollover to a Roth IRA from the plan. While a federal income tax withholding is not required, employers can choose to allow voluntary withholding.

However, it remains to be seen, whether an employee elects voluntary withholding whether or not the IRS will consider the amount withheld as a distribution and then impose an early distribution of 10% on that amount unless an exception applies (for example, 59-1 years old). / 2, 55 & Retired), in which case, separate 1099-Rs will be required.

For more details on a Roth conversion, visit my website.

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