Roth 401(k) Rollover Changes

Employers (large and small) will want to be aware of a provision included in a Senate jobs bill last week: the potential to allow eligible rollovers from a traditional 401(k) plan into a Roth 401(k) plan. Business Insurance has a good summary of some of the details, and here are some of the highlights:

  • The main benefit of the change will be for employees who are looking for tax diversification. You pay income taxes on the Roth contributions up-front, while you pay taxes on the traditional 401(k) assets on the tail-end.
  • Under the proposed legislation, employees could elect to spread the tax payments for the Roth conversion 401(k) balance over a two-year period (2011 and 2012).
  • Small employers who are afraid that tax rates will rise in the future may consider adding a Roth 401(k) option in order to pay their taxes at a known rate now.
  • By keeping 401(k) dollars in an employer-sponsored plan (instead of rolling over to an individual IRA), participants can keep certain ERISA protections.
  • The bill would also allow 457 plans to add a Roth option, for tax years beginning after 2010.

It remains to be seen how this bill might be modified or move forward in the House, but we’ll keep you posted on developments. If the legislation progresses, employers who don’t offer a Roth 401(k) plan will want to consider whether their employees would like to take advantage of such an option.

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