Taking Roth 401(k) To The Next Level

Individuals saving for retirement in an employer-sponsored retirement plan should have the same tax diversification opportunities as individuals saving in an IRA. PSCA is taking action. We are working for changes that would permit Roth conversions within an employer plan.

Starting in 2010 even those making $100,000 or more will be able to convert tax deferred accumulations in traditional IRAs and employer plans into Roth IRA savings. Further, during 2010 those who make such a conversion will be allowed to defer their tax liability over a two-year period in 2011 and 2012. Unfortunately, the Pension Protection Act of 2006 (PPA) provision allowing participants to convert/roll non-Roth money from an employer plan into a Roth IRA did not allow for conversions to a designated Roth account within the plan. Plan participants who want to convert must transfer plan assets into IRAs to do so, and many will, starting in 2010--unless the law is changed.

To bring employer plan and IRA opportunities into conformity and to prevent a migration of plan assets into IRAs, PSCA is recommending changes to the Roth 401(k) and 403(b) rules (i.e. Code Section 402A) that would:

1. Permit plan sponsors to allow plan participants to convert traditional retirement savings (i.e., employee elective deferrals and after-tax contributions, and employer contributions) into Roth savings within their 401(k) or 403(b) plan and to roll monies from all eligible retirement plans, including Roth IRAs, into the designated Roth account of a 401(k) or 403(b) plan.
2. Exempt Roth 401(k) and 403(b) money from the minimum distribution rules in the same manner that Roth IRAs are not subject to those rules. 

This would have several benefits for plan participants:

• Participants could receive the benefits of tax diversification without paying increased fees in a retail environment, thus increasing ultimate retirement savings.
• Participants would be able to take advantage of these tax diversification opportunities for their retirement savings without losing the benefit of the fiduciary oversight and spousal benefit protections (i.e., default beneficiary status and consent requirements) that do not apply in the retail IRA environment.
• Actively working participants who are not eligible for distribution would be able to convert their retirement savings to Roth which allows them to make their tax diversification decisions at any point during the savings period and precludes the need to take any extreme action to create distributable events.
• Participants would have the maximum flexibility, portability and choice with respect to the taxation of their retirement savings.

Even when mega issues distract so many, PSCA continues to maintain its focus and work to improve the employer-sponsored defined contribution system.

David