New Law Expands "In-Plan" Roth 401(k) Conversions

The American Taxpayer Relief Act of 2012 (the "fiscal cliff" bill) allows employers to amend 401(k), 403(b) and governmental 457(b) plans to permit participants to convert pre-tax account balances to Roth account balances.  Previously, such conversions were permitted only when the pre-tax amounts could be distributed.

Background

On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012.  The new law permits 401(k), 403(b) and governmental 457(b) plan sponsors to amend their plans to permit any amount under the plan to be converted to a Roth amount within the plan, even if the amount is not otherwise distributable.  Converted amounts are treated as distributions and taxable in the year of conversion.  The new law is effective January 1, 2013, but permits conversions of balances accumulated before 2013.