Magazine article The CPA Journal

In-Plan Roth Rollovers under the ATRA

Magazine article The CPA Journal

In-Plan Roth Rollovers under the ATRA

Article excerpt

There is a provision in section 902 of the American Taxpayer Relief Act of 2012 (ATRA) that will benefit many taxpayers: if an employee's retirement plan includes a qualified Roth individual retirement account (IRA) contribution plan that permits in-plan Roth rollovers, the employee, regardless of age, may now choose to make an in-plan Roth rollover.

Prior to the enactment of the ATRA on January 2,2013, the opportunity to roll over all or a portion of a retirement account balance to a qualified Roth option within the retirement plan was only available to taxpayers who reached age 5914, died, or became disabled [IRC section 402A(c)(4)(E)(i)]. As amended by the ATRA, IRC section 402A(c)(4)(E)(iii) removed the 5914 age restriction. Now, younger taxpayers have the opportunity to participate in a rollover of retirement plan assets to Roth accounts within the retirement plan. The pretax amount rolled over is taxable as ordinary income in the year of tiie rollover. But because the rollover is no longer considered an early distribution, there is no 10% withdrawal penalty.

An in-plan Roth rollover is similar to a Roth conversion-including many of its benefits. The following summaries of recently published articles on Roth conversions include advice that is relevant when considering an in-plan Roth rollover.

Important Considerations

In The CPA Journal alone, there have been numerous articles offering advice on in-plan Roth rollovers (for those who have reached age 5914) and conversions from a traditional IRA to a Roth IRA. That advice tends to focus on three important considerations that are also applicable to an inplan Roth rollover:

* A comparison of the marginal income tax rate in the year of rollover with the marginal income tax rate during the period of voluntary distributions or required minimum distributions (RMD) from IRC section 401(k), 403(b), 457 retirement plans or traditional IRAs. This is the most important variable when determining whether or not to carry out a retirement plan rollover.

* The number of years until distributions from the retirement plans are expected to start.

* Whether the taxpayer has the (after-tax) savings available to pay the income taxes associated with the in-plan rollover.

All of these considerations are relevant, because the ATRA is likely to result in a lower marginal tax rate (early in a working career) at the in-plan rollover date and it is also likely to result in a greater number of years until the start of distributions. With regard to the availability of savings to pay the income taxes, however, the younger taxpayers impacted by the ATRA may be less likely than a person age 5914 or older to have the after-tax savings available to pay the income taxes on the rollover.

While many of the past articles cited below relate to the conversion of a traditional deductible IRA to a Roth IRA, the same considerations are important in evaluating an in-plan Roth rollover under the provisions of the ATRA.

Marginal Income Tax Rates

With regard to marginal income tax rate considerations, the general advice, as evidenced by articles published in The CPA Journal, is that conditions are favorable to a rollover when the marginal income tax rate in the year of the rollover is less than the expected marginal income tax rate associated with future distributions from the retirement plan (see Neal R. VanZante and Ralph B. Fritzsch, "The Benefits of Roth Accounts," May 2013, pp. 54-56; Neal R. VanZante and Ralph B. Fritzsch, "Roth: Still the Right Choice," February 2010, pp. 11-13; Patrick Boyle and Warren Litman, "The Roth Conversion Question," May 2010, pp. 46-51; Neal B. Hitzig, "Analyzing a Roth Conversion," August 2010, pp. 56-57; David S. Hulse, "What if Congress Reneges on Roths?," August 2009, pp. 56-59; Richard T. Grenci and Anthony F. Grenci, "Using the Roth IRA for CurrentYear Tax Relief," January 2007, pp. 50-55; and Kenneth A. Hansen and Steve Carlson, "Making the Right Choice: Roth and Regular IRAs," June 1998, pp. …

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