In-plan Roth Conversions

Key Takeaway

A Roth conversion feature permits you to convert certain pre-tax amounts to a Roth account without taking a distribution from the plan. See your enrollment materials or contact your plan sponsor for details about your plan.

Roth Accounts

A Roth contribution is best understood when compared to a traditional retirement account. The two arrangements have opposite treatment regarding the timing of income taxation.

A traditional account contribution is not taxed and, upon distribution, both contributions and earnings are taxable. In contrast, a Roth contribution is taxed in the year it is made and if the employee meets certain distribution criteria, (e.g., holds the account for at least five years and is age 59½ or older) the earnings can be withdrawn tax-free.

Roth Conversions

A Roth conversion occurs when you elect to transfer some or all of your pre-tax account into a Roth account. This conversion results in immediate taxation on the converted amount. The converted amount and all earnings are then treated just as a Roth account upon distribution.

What amounts can be converted?

Your plan sponsor determines which sources are available for Roth conversion. Talk to your human resources representative to learn what amounts are eligible.

Roth Conversion Taxes

Even though the conversion occurs entirely within the plan, it still triggers ordinary income tax. The conversion is not subject to the 10% excise tax for early withdrawal at the time of the event, but it may be if you withdraw your converted amount within five years of the conversion. You will receive IRS Form 1099 for any pre-tax amount converted to a Roth account and you must recognize the conversion amount as income in the year of the transaction.

Required Minimum Distributions

Unlike a Roth IRA, Roth amounts within a qualified retirement plan, including Roth conversions, are subject to required minimum distribution rules. This means you will be required to start taking distributions when you terminate employment or if later, reach age 72*. If you are a more than 5% owner, distributions must begin at age 72*.

Can a Roth Conversion Later Be Recharacterized?

Unlike Roth IRA conversions, you may not recharacterize a Roth conversion within your retirement account. Since the Roth conversion is irrevocable, we recommend discussing the tax implications with a tax advisor or financial consultant to determine if it is right for you.

*Individuals attaining age 70½ prior to January 1, 2020, are subject to pre-SECURE Act distribution requirements.