The in-plan Roth transfer provision was adopted as part of ATRA (American Taxpayer Relief Act of 2012).  An in-plan Roth transfer is a conversion of an amount from a non-Roth account in a 401(k), 403(b) or 457(b) plan to a Roth account in the same plan.

Who is eligible for an in-plan Roth transfer?

You may elect to transfer money from pre-tax to Roth within the same retirement plan if:

1.      You have a balance in a 401(k), 403(b) or a 457(b) plan;

2.      Your plan has a Roth provision;

3.      Your plan is amended to allow for in-plan Roth transfers;

4.      The amounts being transferred are not eligible for distribution.

If the four above-mentioned criteria are satisfied, here are three reasons you may want to consider an in-plan Roth transfer;

1. The earnings on Roth in-plan transfers grow tax free – Yes you pay taxes on the transfer amount at the end of the year in which the transfer occurred, but the growth on the transfer amount is TAX FREE.  The amount you pay in taxes today may be less than the amount of taxes you avoid (not defer, but avoid) by not having to pay any taxes when you make an eligible Roth distribution from your retirement plan.
2. Tax planning is simplified during your golden years – Would you like to fund your retirement without having to ask yourself, what are the tax implications every time you distribute money from your retirement account?  There is peace of mind knowing that once you are eligible to withdraw Roth money from your plan, you won’t have to grab a calculator or call your CPA to figure out the magic number you should withdraw for the tax year (without affecting your eligibility for tax deductions, benefits, etc.).  PAY (taxes) today, PLAY tomorrow!
3. Retirement Plan Legislation is anything but static! Laws change – If you are interested in taking advantage of the in-plan Roth transfer feature, don’t assume the option will be available into perpetuity.  (Although the current appeal of the in-plan Roth transfer is that it helps fuel our economy today with increased tax revenue).

Consult your financial advisor and/or CPA to discuss the logistics of the in-plan Roth transfer (timing, investment vehicles, money types (e.g. rollover versus pre-tax deferral conversion).  The process may appear to be simple, but the moving parts are numerous and you should consider both the benefits and disadvantages before you make your final decision to request an in-plan Roth transfer.

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