Our book Go Roth! lists eight ways the availability of Roth retirement accounts has increased since 2005. The American Taxpayer Relief Act of 2012 (“ATRA”) adds another. Beginning in 2013, if permitted by your employer’s plan, you can convert an existing 401k, 403b or 457b account to a Roth account, even if you aren’t eligible to take a distribution.
Prior to ATRA, the law permitted in-plan Roth conversions only to those plan participants who were eligible to take a distribution that would be eligible for a rollover. For most people, this meant a Roth conversion wasn’t possible while still working for the employer that maintains the retirement plan. At that point, you could convert your account outside the plan by rolling it to a Roth IRA, so the opportunity to convert to a Roth account inside the plan wasn’t particularly valuable.
The new law will permit conversions even when you aren’t able to take a distribution. Depending on your personal finances and tax situation, this may be a great way to increase the long-term potential of your retirement account.
Employers aren’t required to offer Roth accounts in their retirement plans, and even if they do, they aren’t required to permit in-plan conversions. We expect most employers will eventually adopt these provisions, but this opportunity won’t be immediately available to participants in all retirement plans.
As explained in our book, there are a few things you should know before doing an in-plan Roth conversion. Unlike other Roth conversions, you don’t have the opportunity to undo an in-plan conversion later, using a recharacterization. Also, due to an odd quirk in the legislative language, it isn’t clear that an in-plan Roth conversion starts the five-year clock that has to expire before you can take qualified distributions. Until Congress fixes this glitch, you may want to make at least a small regular contribution to your Roth account, if possible, so there’s no doubt that this clock is running. Further details on in-plan conversions appear in Go Roth!