This provision may be especially valuable to high-income clients, according to Thomson Reuters.
The Joint Committee on Taxation has just released the “General Explanation of Tax Legislation Enacted in the 112th Congress”, with explanations of the American Taxpayer Relief Act of 2012. One provision removes many of the limitations on making a qualified rollover from a qualified plan to a designated Roth account in an “in-plan Roth rollover” after December 31, 2012.
“The Blue Book explanation of it is particularly helpful since no formal committee report or other explanation has been provided for this new provision,” according to Thomson Reuters.
Under the new law, if a 401(k) plan, 403(b) plan, or governmental 457(b) plan also has a Roth contribution program, the plan may allow an individual to elect to have the plan transfer any amount to a designated Roth account maintained for the individual's benefit. This is effectively a Roth conversion: the plan participant will report taxable income for moving pretax money into the Roth account but subsequent distributions will be tax-free, after five years and after age 59-1/2.
Joint filers with modified adjusted gross income (MAGI) over $183,000, and single filers with MAGI over $125,000 cannot contribute to a Roth IRA in 2013.
“There is no such income restriction on in-plan Roth rollovers,” Thomson Reuters’ tax analysts observe. Thus, high-income clients can take advantage of the expanded in-plan Roth rollover rules to fund their Roth 401(k), 403(b) or 457(b) accounts. Those Roth plans, in turn, can then be rolled over, tax-free, to a Roth IRA when the employee retires or leave the company.
Thomson Reuters also notes that this new provision does not limit the number of rollovers a plan participant may make. Thus, participants probably will be able to make annual conversions of an amount that will keep them from moving into a higher tax bracket.