The Joint Committee on Taxation recently clarified provisions relating to the expanded in-plan Roth conversions.
As discussed in our March 11 post, the American Taxpayer Relief Act of 2012 expanded in-plan Roth conversions to include all pre-tax accounts, whether or not the plan allowed for an actual distribution.
Questions arose regarding the application of “distribution restrictions” on these accounts after the conversion. Would the conversion amounts be deemed rollover accounts or would they retain the distribution restrictions associated with the pre-tax account in which they came from?
The answer is that, yes, these conversion amounts will retain the distribution restrictions associated with the pre-tax account. In essence, these conversions are just changing the tax status of the account, but all other distribution rules continue to apply.
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For example, if you convert a pre-tax 401k account to a Roth account, the Roth account retains the distribution restrictions applied to the 401k account. It is not treated as a rollover account, and therefore is subject to the age 59-1/2 distribution requirements.
If spousal consent is required to receive a distribution from the plan, it is not required at the time of conversion, but will be required when an actual distribution occurs from the plan.
Because of the distribution restrictions on converted accounts, your plan’s record keeper must track these accounts appropriately to ensure that your plan complies with its plan document. As always, Shore Tompkins is happy to work with your record keeper to coordinate the details of this tracking.