Castle Rock Investment Company

Independent Guide, Trusted Partner.

In-Plan Rollovers to Roth

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On Monday, September 27th, 2010, the President signed into law the Small Business Jobs Act of 2010, which permits employers to amend their 401(k) plans to allow participants to transfer an “eligible rollover distribution” (ERD) into their designated Roth account.

For 2010 only, if a participant rolls over an ERD into a designated Roth account in a 401(k) plan, he or she can include:

  1. half of the taxable amount of the rollover in 2011 gross income and half in 2012 gross income; or
  2. the entire taxable amount of the rollover in 2010 gross income.
So what’s the catch?  The plan document would have to be amended and your recordkeeper would need to update their system to track in-plan conversions.  These are both easier said than done.
In addition, the law only allows matching and profit-sharing contributions to be eligible for rollover distributions before the age of 59 1/2 by amendment.  Elective deferrals may not be distributed prior to the age of 59 1/2 while the participant is “in-service” (employed by you).
Unless your plan document provider and recordkeeper can handle these updates quickly the new law is just legislative capital designed to make elected officials look good.
Employees that are interested in taking advantage of the special 2010 Roth conversion tax treatment should consider converting an “in-service 59 1/2” eligible rollover distribution to a Roth IRA.  You simply need to verify that your plan allows in-service distributions for employees over the age of 59 1/2.