Modification of Roth In-Plan Conversion Rules Provides Participants Greater Flexibility

by BakerHostetler

Tucked in the provisions of the year-end financial cliff legislation (the "American Taxpayer Relief Act of 2012") was a provision which creates greater flexibility in the conversion of qualified plan dollars to tax-free status through in-plan Roth conversions.


Under prior law, a retirement plan, such as a 401(k) plan, a 403(b) annuity plan or a 457 governmental plan, that had a Roth elective deferral feature could allow a participant to roll over his non-Roth account plan balances into a Roth account under the plan (through a so-called "in-plan Roth conversion"). The amount rolled over to the Roth account would become taxable income to the participant at the time of the rollover. Thereafter, the rolled over amount plus all further appreciation would be exempt from tax, assuming compliance with the normal Roth-qualified distribution requirements (i.e., distribution after age 59-1/2, disability or death and distribution made more than five years after the Roth account is established). An in-plan Roth conversion can be an effective tool for a participant to manage the risk of future tax rate increases.

However, under prior law, in order to roll over an amount as an in-plan Roth conversion, that amount had to be otherwise eligible for a distribution from the plan. For example, amounts contributed by an employee through a 401(k) cash or deferred arrangement generally could not be rolled over into the Roth account through an in-plan Roth conversion before the earlier of the employee's severance from employment or attainment of age 59-1/2 (because 401(k) cash or deferred amounts may not be distributed prior to attainment of age 59-1/2, severance from employment or certain other events). This distribution requirement generally limited the opportunity for in-plan Roth conversions to older participants.

Effect of Change

The American Taxpayer Relief Act of 2012 relaxed the rules for in-plan Roth conversions by providing that a plan may permit a participant to transfer an amount into the plan's designated Roth account even if the amount is not otherwise distributable under the plan. This change provides added flexibility, not only for 401(k) plans, but also for 403(b) tax-deferred annuity plans, 457(b) deferred compensation plans and other plans which have restrictions on in-service distributions. Younger employees who are taxed at comparatively lower effective tax rates and with longer investment horizons may now find the in-plan Roth conversion to be an attractive tax and retirement planning strategy under this new, relaxed rule.

Plan Must Be Amended to Permit Conversion

Employers who wish to make available the new in-plan Roth conversion opportunity to plan participants will need to amend their plans to specifically authorize in-plan Roth conversions. In-plan Roth conversions are permissible only if the plan also permits regular designated Roth contributions to be made. Furthermore, any distribution restrictions which were applicable prior to the in-plan Roth conversion must continue to apply after the conversion. For example, 401(k) salary deferral contributions which are ineligible for pre-age-59-1/2 in-service distributions (except in the case of a "hardship") will continue to be subject to those restrictions on distributions following the in-plan Roth conversion.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:


BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.