The IRS has issued guidance on in-plan Roth Individual Retirement Account rollovers, that is, rollovers within a retirement plan to designated Roth IRAs in the same plan.
The guidance in Notice 2013-74 relates to the expansion of such rollovers under the American Taxpayer Relief Act of 2012, which settled the expiring tax breaks as part of the fiscal cliff deal around the New Year. The notice also provides guidance that applies to all in-plan Roth rollovers described in Section 402A(c)(4) of the Tax Code.
Section 402A of the Tax Code sets out the rules for designated Roth contributions. A qualified distribution from an employees designated Roth account is excludable from gross income. A distribution from an employees designated Roth account that is not a qualified distribution is includible in gross income in proportion to the employees investment in the contract (basis) and earnings on the contract.
Section 2112 of the Small Business Jobs Act of 2010 added Section 402A(c)(4) to the Tax Code for distributions made after Sept. 27, 2010, enabling a plan that includes a qualified Roth contribution program to allow employees to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan. To be eligible for an in-plan Roth rollover, the amount had to satisfy the rules for distribution under the Tax Code. The 2010 law also expanded the types of plans that could include a qualified Roth contribution program. Previously, only 401(k) plans and 403(b) plans were allowed to include qualified Roth contribution programs, but for taxable years beginning after 2010, Section 2111 of the SBJA also permitted governmental 457(b) plans to include a qualified Roth contribution program.
Section 902 of the American Taxpayer Relief Act added Section 402A(c)(4)(E) to the Tax Code to expand the type of amounts eligible for an in-plan Roth rollover. It provides that the in-plan Roth rollover of these additional amounts will not be treated as violating the statutory distribution restrictions applicable to elective deferrals (or to annual deferrals in the case of governmental 457(b) plans). It is effective for in-plan Roth rollovers made after Dec. 31, 2012.
Section 402A(c)(4)(E) provides that a plan with a designated Roth account can permit an in-plan Roth rollover of an amount not otherwise distributable under the plan. Among the items of guidance provided in the questions and answers section of last week's notice, the IRS said that thus, the following contributions (and the earnings on them) may now be rolled over to a designated Roth account in the same plan, without regard to whether the amounts satisfy the conditions for distribution: elective deferrals in 401(k) plans and 403(b) plans; matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions described in Section 1.401(k)-6; and annual deferrals made to governmental 457(b) plans. The federal governments Thrift Savings Plan is treated as a 401(k) plan for this purpose.
Michael Cohn is the editor-in-chief of AccountingToday.com.