By Beverly DeVeny, IRA Technical Expert Follow Me on Twitter: @BevIRAEdSlott
IRS has released guidance on the conversion of 401(k) and 403(b) plan assets to Roth 401(k) or Roth 403(b) accounts in Notice 2010-84. This guidance also applies to governmental 457(b) plans beginning January 1, 2011. Here are the highlights:
Plan participants, spouses, and alternate payees who are current or former spouses can do the in-plan Roth conversion.
The funds converted must be eligible for rollover from the plan.
The conversion is not treated as a distribution in the case of a plan loan being converted and spousal consent is not needed.
In-plan rollovers are not subject to the 10% early distribution penalty and direct rollovers are not subject to 20% mandatory withholding.
If the conversion is done in 2010 the participant can spread the income over 2011 and 2012 or elect to include all the income on their 2010 tax return.
All in-plan Roth conversions must make the same tax election – either the two-year spread or to include the income on the 2010 tax return. The election is made on Form 8606.
There is NO option to recharacterize an in-plan Roth conversion.
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