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TAX UPDATE

The American Taxpayer Relief Act of 2012 Loosens Restrictions to Encourage Plan Rollovers to Roth Accounts

By Tom Reinhart, CPA - Senior Consultant

Almost buried in the new law is a pension provision that removes many of the limitations on making a qualified rollover from a qualified employer plan to a designated Roth account in an "in-plan Roth rollover." The new provision makes it easier than ever to convert any portion of an employee's balance in an employer-sponsored qualified retirement plan account into a popular retirement plan option, a Roth account under the plan.

Roths offer several advantages, namely:

  • Earnings within the account are tax-sheltered as they are with a traditional qualified employer plan or IRA.
  • Unlike a traditional qualified employer plan or IRA, withdrawals from a Roth account aren't taxed if some relatively liberal conditions are satisfied.
  • A Roth account owner does not have to take required minimum distributions after reaching age     70 ½, as is generally the case with traditional qualified employer plans or IRAs.
  • Beneficiaries of Roth accounts also enjoy tax-sheltered earnings and tax-free withdrawals; they do, however, have to initiate regular withdrawals from a Roth account after the owner dies.

Making an in-service rollover to a Roth account doesn't come without a price. In exchange for tax-free distributions from the account down the road, an immediate tax is triggered on the amount rolled over from the qualified plan. For example, a taxpayer in the 28% federal tax bracket who converts $100,000 from an employer-sponsored plan funded entirely with pre-tax dollars to a Roth account would owe $28,000 of tax. Consequently, some advisors have identified young professionals as among those employees most likely to benefit from rolling over into Roth accounts because they have the means to afford the current tax hit and may significantly benefit from years of tax-free earnings in the Roth account.

The conversion option is only available if employer plan sponsors include the in-service rollover feature in the plan. Offering in-service rollovers to employees is discretionary, not mandatory. By properly amending the plan, employers can offer employees an additional benefit without an ongoing funding commitment.

If you are interested in learning more about in-service Roth rollovers, or other tax issues addressed by the 2012 Taxpayer Relief Act, please contact your local Blue & Co. office.

 

If you have further questions or would like to speak to one of our professionals regarding any of the tax issues discussed above, please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE.
 

Please visit our website at http://www.blueandco.com for more information regarding the services we provide.

CIRCULAR 230 DISCLOSURE: To ensure compliance with recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.


 

 

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