in-plan roth conversion and NUA treatment
My company’s retirement plan offers an in-plan Roth conversion once per year. This year I elected to put after-tax money into the plan with the intention of converting that money to a Roth at end of year. My after-tax money is invested in mutual funds, however I also hold pre-tax 401k money in my company stock plan and it’s possible that I would end up using NUA (many years down the road).
I’m am now looking to execute the conversion of the after-tax money (no company stock) into a Roth but noted the below disclaimer:
“My in-plan Roth conversion may cause me to lose favorable tax treatment on the net unrealized appreciation of my shares in the company Stock Fund when distributed from my account in a future withdrawal or distribution, regardless of whether I include any company shares in this conversion.”
It’s the very last clause that I’m struggling to understand. Is there a reason an in-plan Roth conversion of after-tax money, not invested in company stock, would jeopardize my ability to use NUA on my company 401k stock in he future?
Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2016-12-29 18:53
I think the reason is “intervening distributions”. An IRR is treated as a distribution and rollover even though the transaction is entirely within the plan. The quote indicates “may cause” since an intervening distribution is negated by the next triggering event. Your next triggering event would likely be separation from service and would restore the ability to do a qualified LSD and use NUA. However, if you retired and left the plan in place and executed an IRR after retirement, that would become an intervening distribution and you may not have another triggering event left to restore the ability to do a qualified LSD. Therefore, you might check the plan SPD or document to see if the plan allows IRRs after retirement, as I do not see a need for the disclaimer unless the plan does allow post retirement IRRs. If you do an IRR now and then retire, do not take intervening distributions (eg. another IRR) after retirement, you should still be able to do the required LSD.