Roth 401(k) Rollover Bill Update

The Small Business Jobs Act of 2010 (H.R. 5297) passed the Senate last week and is expected to be signed into law by the President. As we mentioned in a previous post, there are a couple of retirement plan changes included in this bill. They include:

– Add a Roth option for 457(b) plans. This puts 457(b) plans for state and local governments on a similar footing with corporate 401(k) plans with regards to offering Roth deferrals.

– Allow eligible rollover distributions from a traditional 401(k) plan [or 403(b) or 457(b)] to be converted to Roth accounts within an employer’s current Roth 401(k) plan.

There is a great summary of these two provisions that was published by the American Benefits Council. It has lots of legal and tax details, as well as a couple of rough numerical examples. A couple of the points that they highlight:

– The Roth conversion is only available for “eligible rollover” distributions. In a traditional 401(k) plan, this generally means that the participant is at least age 59 ½ and eligible to take their money out of the plan. The conversion option in NOT generally intended for a young employee who just wants to convert their traditional 401(k) to a Roth 401(k).

– The taxes paid on the Roth conversion can be paid from non-plan dollars instead of with assets within the plan. Thus, a participant could convert $100,000 of traditional 401(k) into $100,000 of Roth 401(k), and just pay the tax on the $100,000 from their personal assets.

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