New Rules For Roth Conversions?

Submitted by Russell Boley on Wed, 2013-01-02 15:41

A Denver Post newspaper article this morning concerning the “Fiscal Cliff” agreement referred to the $24 billion cost of delaying the across-the-board spending cuts for 2 months as being partially offset by “new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.” What “new rules” could this be referring to?



Submitted by Seth Poppel on Wed, 2013-01-02 21:26

SEC. 1002. AMOUNTS IN APPLICABLE RETIREMENT PLANSMAY BE TRANSFERRED TO DESIGNATEDROTH ACCOUNTS WITHOUT DISTRIBUTION.(a) IN GENERAL.—Section 402A(c)(4) is amended by adding at the end the following:‘‘(E) SPECIAL RULE FOR CERTAIN TRANSFERS.—In the case of an applicable retirement plan which includes a qualified Roth contribution program—  ‘‘(i) the plan may allow an individual to elect to have the plan transfer any amount not otherwise distributable under the plan to a designated Roth accountmaintained for the benefit of the indi6vidual,‘‘(ii) such transfer shall be treated asa distribution to which this paragraph applies which was contributed in a qualifiedrollover contribution (within the meaningof section 408A(e)) to such account, and ‘‘(iii) the plan shall not be treated asviolating the provisions of section 401(k)(2)(B)(i), 403(b)(7)(A)(i),403(b)(11), or 457(d)(1)(A), or of section 8433 of title 5, United States Code, solely by reason of such transfer.’’.



Submitted by Alan - IRA critic on Wed, 2013-01-02 22:37

  • As you can see by reading the prior post, this provision does not affect Roth IRAs. It is a technical correction of the tax code that allows a qualified retirement plan which offers a desigated Roth option to include in plan Roth rollovers (aka IRRs) under terms that allow employees to do these rollovers which are treated as taxable distributions even though the plan would not otherwise permit an existing employee to take a distribution. IRRs were made available two years ago, but some plans were hesitant to include them and this clears the way for more plans to include them without concern that employees will be able to remove funds from the plan.
  • This is a voluntary way to encourage these taxable rollovers and provide immediate and voluntary tax revenue to the US Treasury. Basically, it just borrows from the future by moving the tax revenue from the future to the present. There is no way to determine if this Section will generate $12 billion either, which is probably the 10 year projection of such revenue.


Submitted by Russell Boley on Wed, 2013-01-02 22:46

Thanks very much for the the excellent replies.



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