Traditional 401k to Roth 401k Conversions
I received a call today from another CPA stating that he heard that clients can do a conversion from a pre-tax Traditional 401k to a Roth 401k beginning in 2010 similar to the IRA to Roth conversions. I don’t think this is the case and I am curious if any one else has heard such rumors?
In addition, if a company allows in service rollovers, can you convert Traditional pre-tax 401ks directly to Roth IRAs even though they are still employed with the company? Are there any options for these employees that make a lot of money and want to take advantage of the coversions to Roths starting in 2010 utilizing their current 401k plans?
Thanks,
TC
Permalink Submitted by Alan Spross on Thu, 2009-11-19 21:57
You are correct. There are no conversions allowed within a 401k from the pre tax to the designated Roth option. Employees may be allowed to change the direction of their regular plan contributions periodically between the two options.
Plans that allow in service distributions should allow direct rollover conversions directly to a Roth IRA. Unless employees have traditional IRA or QRPs from former employers to tap, they are probably not going to be able to free up retirement assets for conversions. They might be limited to making non deductible TIRA contributions and immediately converting them each year. They may also be able to change their current retirement plan regular contributions to a Roth option. Most plans do not allow in service distributions until the attainment of a certain age, typically 59.5.
Permalink Submitted by Eric Rigby on Tue, 2009-11-24 20:48
A 401(k) plan is subject to rules that restrict a participant’s access to his or her 401(k) plan accounts. All 401(k) plans may provide that a participant’s accounts may be distributed upon death, disability, or severance from employment. [Treas. Reg. § 1.401(k)-1(d)] Whether accounts are accessible in other situations depends on the type of contribution used to fund a particular account. In general, accounts attributable to elective contributions (including Roth contributions) and safe harbor contributions are, under the law, less accessible to participants than accounts funded with other types of employer contributions.
Treas. Reg. § 1.401(k)-1(d)
(d) Distribution limitation
(1) General rule. –A cash or deferred arrangement satisfies this paragraph (d) only if amounts attributable to elective contributions may not be distributed before one of the following events, and any distributions so permitted also satisfy the additional requirements of paragraphs (d)(2) through (5) of this section (to the extent applicable) —
(i) The employee’s death, disability, or severance from employment;
(ii) In the case of a profit-sharing, stock bonus or rural cooperative plan, the employee’s attainment of age 591/2, or the employee’s hardship; or
(iii) The termination of the plan.
(2) Rules applicable to distributions upon severance from employment. –An employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. An employee does not have a severance from employment if, in connection with a change of employment, the employee’s new employer maintains such plan with respect to the employee. For example, a new employer maintains a plan with respect to an employee by continuing or assuming sponsorship of the plan or by accepting a transfer of plan assets and liabilities (within the meaning of section 414(I)) with respect to the employee.
TREATISE, 401(k)-ANSWER-BOOK, Q 15:61 Under what circumstances may amounts attributable to elective contributions be distributed?
Amounts attributable to elective contributions (including Roth contributions) may be distributed under the following circumstances:
1. Death, disability, or severance from employment;
2. Attainment of age 591/2 (profit sharing or stock bonus plan only);
3. Hardship as discussed in Qs 15:44-15:56 (profit sharing or stock bonus plan only); or
4. Termination of the plan (see chapter 21).