Designated Roth Accounts - In-Plan Rollovers to Designated Roth Accounts
A plan with a designated Roth program may allow participants to transfer eligible rollover distributions to a designated Roth account from another account in the same plan. The Roth contribution program must be in place before a plan can offer in-plan Roth rollovers. A Roth program cannot be set up solely to accept in-plan rollovers – it must also accept elective deferrals from participants.
Distributions eligible for in-plan Roth rollovers
Not all pre-tax plan balances can be transferred to a designated Roth account. To be eligible for an in-plan rollover, the amount must be eligible for distribution to the participant under the terms of the plan and must be otherwise eligible for rollover (an eligible rollover distribution).
In general, an eligible rollover distribution is a distribution that is not:
- A required minimum distribution,
- A corrective distribution of excess contributions or deferrals,
- A hardship distribution,
- A loan treated as a distribution,
- A distribution that is one of a series of substantially equal payments made at least annually over a lifetime or 10 years,
- Dividends on employer securities, or
- The cost of life insurance coverage.
A plan sponsor may amend the plan to add distribution options beyond those currently allowed under the plan to take advantage of in-plan Roth rollovers. For example, a sponsor may add in-service distributions for participants over age 59½ to allow employees to make in-plan Roth rollovers. A plan sponsor is permitted to condition a new in-service distribution option on the employee’s election to roll it to a designated Roth account in the plan.
Who can elect an in-plan Roth rollover?
An employee, surviving spouse beneficiary, or an alternate payee who is a spouse or former spouse can elect an in-plan Roth rollover.
Participant tax consequences of in-plan Roth rollover
The value of the distribution less the participant’s basis, if any (the taxable amount of the distribution) must be included in the participant’s gross income. For a typical rollover of money from a pre-tax 401(k) account, the entire amount of the rollover, including earnings, will be taxable.
The additional 10% early withdrawal tax does not apply to an in-plan Roth rollover. However, there are special rules that could make the rollover subject to this tax if it is withdrawn from the designated Roth account within five years.
Year rollover amount is included in gross income
A plan participant must generally include any previously untaxed amounts in gross income during the year the rollover occurs. For rollovers in 2010 only, half of the recognized income is reportable in 2011 and half in 2012.
Rollover is irreversible
An in-plan rollover to a designated Roth account is irreversible after the transfer is made. The amount may not later be recharacterized or returned to the account it came from. This treatment is different from rollovers to a Roth IRA, which may be recharacterized before the tax return due date.
In-plan Roth rollovers as distributions
A distribution that is transferred to a designated Roth account in a direct rollover is not treated as a distribution for these purposes:
- A plan loan transfer is not treated as a new loan
- Spousal consent is not required
- The transferred amount is counted in determining whether accrued benefits exceed $5,000
- Rights to other distribution forms are not eliminated
Notice 2010-84 explains the special rules for allocating distributions between rollover and regular Roth accounts.
Retroactive amendment deadline
A 401(k) plan sponsor had until December 31, 2011, to adopt plan amendments related to 2010 in-plan Roth rollovers. The effective date of the amendment should be the date the plan first operates in accordance with the amendment. (See Notice 2010-84, Q&A-15.)
A 403(b) sponsor generally has until the later of the end of its remedial amendment period or the last day of the first plan year in which the amendment is effective. (See Notice 2010-84, Q&A-16.)
Withholding on in-plan Roth rollovers
20% mandatory withholding does not apply to an in-plan Roth direct rollover. However, if you receive your distribution in cash, 20% withholding will apply even if the amount is rolled over to a designated Roth account within 60 days.