New Law Permits In-Plan Roth Conversions

The Small Business Jobs Act of 2010, which was signed into law by President Obama September 27, 2010, permits "applicable retirement plans" with designated Roth accounts to accept rollovers of otherwise distributable amounts from within the plan. This is often referred to as an in-plan Roth conversion. This provision is effective immediately and eliminates the need for employees and spousal beneficiaries to roll non-Roth money out of their retirement plan into a Roth IRA in order to take advantage of a Roth program. An "applicable retirement plan" is a 401(k) plan, a 403(b) plan, and, beginning January 1, 2011, a governmental 457(b) plan.

The in-plan Roth conversion may be attractive to plan participants because of the special tax rule for 2010, which allows a participant who rolls over tax deferred amounts into a Roth account in the plan to include one-half of the distribution amount in gross income in 2011 and include the remainder in 2012.