A plan with a designated Roth program can allow rollovers to a designated Roth account from another account in the same plan (an “in-plan Roth rollover”). Designated Roth accounts can’t be set up solely to accept in-plan rollovers - they must also accept elective deferrals from participants.
Amounts eligible for in-plan Roth rollovers
Any vested plan balance, including earnings, can be rolled over to a designated Roth account. The amount doesn’t have to be eligible for distribution; however, the rollover must be direct (not a 60-day rollover) if the amount is not otherwise eligible for distribution.
A plan can allow in-plan Roth rollovers of:
- elective salary deferrals
- matching contributions
- nonelective contributions
- after-tax employee contributions
- amounts rolled into the plan from another plan
- qualified matching contributions (QMACs)
- qualified nonelective contributions (QNECs)
The plan can specify which of these amounts are eligible for in-plan Roth rollovers and how often these rollovers can be done.
Who can elect an in-plan Roth rollover?
The plan participant (employee), surviving spouse beneficiary, or alternate payee who is a spouse or former spouse can elect an in-plan Roth rollover.
Participant’s tax consequences
An in-plan Roth rollover usually results in taxable income to the participant. A typical rollover from a pre-tax account will result in the entire amount of the rollover, including earnings, being included in gross income. The amount includible in gross income for the year of the rollover is:
- the amount rolled over, less
- any basis in the amount transferred.
Participants may want to increase their tax withholding amount or make an estimated tax payment for the period in which the in-plan Roth rollover is completed.
The additional 10% early withdrawal tax doesn’t apply to the amount of an in-plan Roth rollover. However, the distribution may be taxable and subject to the additional early withdrawal tax if the participant withdraws it from the designated Roth account within five years (see the FAQs).
In-plan Roth rollover is irreversible
An in-plan Roth rollover cannot be reversed after the transfer is made. The rolled over amounts can’t later be returned to the transferring account. This treatment is different from rollovers to a Roth IRA, which may be recharacterized within a certain time limit.
In-plan Roth rollovers as distributions
A direct rollover to a designated Roth account is generally treated as a distribution followed by a transfer to the Roth account. But:
- A plan loan transfer isn’t treated as a new loan
- Spousal consent isn’t required
- The rollover is counted in determining whether the accrued benefit exceeds $5,000
- Rights to optional forms of distribution aren’t eliminated
The plan sponsor doesn’t have to give the participant a 402(f) notice (explaining the rollover options) for an in-plan Roth rollover of an otherwise nondistributable amount.
Notice 2010-84 explains the special rules for allocating distributions between rollover and regular Roth accounts.
2014 amendment deadline applied to Roth provisions effective in 2013 and 2014
Plan sponsors may want to allow participants to make in-plan Roth rollovers of otherwise nondistributable amounts. Sponsors generally had until the end of 2014 to add an amendment permitting in-plan Roth rollovers for 2013 and 2014. See the amendment deadlines.
Withholding on in-plan Roth rollovers
Plan sponsors shouldn’t withhold taxes from direct rollovers to designated Roth accounts.
If you receive your distribution in cash, however, the plan sponsor must withhold 20% federal income tax even if you later roll over your distribution to a designated Roth account within 60 days.