11 December 2017

IRS Issues Guidance On Roth 401(k) Rollovers

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The Internal Revenue Service has issued guidance on rollover activity for plan sponsors on with Roth 401(k) features as part of their plan. The guidance addresses rollovers, which were first allowed in 2013,  by participants younger than retirement age.

The key part of the IRS guidelines explains that any rollover made before a participant reaches age 59½ must be done directly from the qualified retirement plan account to the IRA. Because distribution of funds is not allowed before that age, the 60-day rule that applies to older account holders does not apply.

Plan sponsors have until December 31, 2014 to amend their plans to allow such rollovers and this will extend the deadline to allow participants to allow employees to defer salary into the Roth account.

The IRS advisory also covered:

  • Plans may restrict the types of contributions and balances eligible for in-plan Roth rollovers, such as limiting rollovers to balances that are otherwise distributable. This would avoid the burden of tracking distribution restrictions for some or all of the Roth balances.
  • Plan sponsors may eliminate in-plan rollovers at any time, although the timing must not discriminate in favor of highly compensated employees.
  • Favorable tax treatment applies only to Roth distributions made after five years from the date the Roth account was established. When the first contribution made to an employee’s Roth account is an in-plan rollover, the five-year clock applies and begins on the first day of the first taxable year of the rollover.
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