Fiscal Cliff Bill Allows In-Plan Roth 401(k) Conversions

Effective January 1, 2013, the American Taxpayer Relief Act of 2012, more commonly known as the “fiscal cliff” bill, allows participants in traditional 401(k) plans to convert some or all of their account balances into a Roth 401(k). Under a traditional 401(k), money goes into an account on a pre-tax basis, and then participants pay taxes when they make withdrawals from the account, usually during retirement. Under a Roth 401(k), participants pay taxes on the money before it goes into the account, and then participants make withdrawals from the account tax-free, provided the money was in the account for five years and the participant is age 59 ½, disabled, or deceased.

In 2010, Congress allowed conversion of traditional 401(k) plans to Roth 401(k) plans in very limited circumstances, i.e., only if the participant was already eligible for a distribution. Effective January 1, 2013, these restrictions are lifted, allowing in-plan conversions for all participants, provided their plan has a Roth option, and is amended to allow for in-plan conversions. Congress expects the removal of the restrictions on in-plan conversions to raise $12 billion in taxes over the next 10 years, because participants who choose in-plan conversions will have to pay taxes on their converted account balances. Any increase in tax revenue in the short-term, however, would necessarily be followed by a decrease in tax revenue in the long-term. Whether an in-plan conversion makes sense for an individual participant will vary depending on the participant’s individual circumstances.

For more information about in-plan Roth 401(k) conversions, please contact your Trust Fund counsel.

By Kristina M. Zinnen

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