Not So Fast on Roth Conversion Within 401k

October 21, 2010

Speaking at a conference, a Treasury official said plan sponsors should wait until official guidance is published before implementing the recent law permitting Roth conversions to occur within a 401k plan. Tax Notes reports that the official acknowledged the need for the Treasury to act quickly on this issue.

The committee report accompanying the law that permits these Roth conversions indicates Congress intended to make them available before the end of 2010 so that taxpayers would be able to take advantage of the special deferral rule for income from Roth conversions occurring this year. It seems unlikely that employers will be able to move forward within that timeframe if they have to wait for guidance from the Treasury.

Political wrangling delayed adoption of the legislation until much later in the year than was likely anticipated when the committee report was written.

One issue that has caused consternation is the question of who can do these conversions. The law permitting these conversions doesn’t impose an age requirement. However, it says you have to be in a position to take a distribution from the plan, which normally means you have to be at least 59½ if you’re still working for the company. (The company must also permit in-service distributions, and not all companies do this.) If Congress intended to allow all 401k participants to convert their regular accounts to Roth accounts, an amendment to the law with a technical correction may be required.