However, IRC Section 402A(c)(4)(A)(i) is explicit in stating that the conversion is still a distribution that is taxable, to the extent it otherwise would be.Īnd because it’s still treated as a “distribution”, indeed that means the guidance of IRS Notice 2014-54 about distributions that include after-tax contributions out of a 401(k) plan still applies, so the distribution is subject to the pro-rata rule here. The Small Business Jobs Act of 2010 created IRC Section 402A(c)(4), which stipulated that a distribution from a 401(k) plan can be rolled over to a designated Roth account (i.e., a “Roth 401(k)” plan), in what now is often called an “intra-plan Roth conversion” transaction.Īs a Roth conversion, the funds that are transferred from the 401(k) to the Roth 401(k) are not subject to any early withdrawal penalties. My gut tells me the pro rata rule applies to in-plan conversions to a Roth 401k, but I can find that anywhere. Question is - do you think the pro rata rule applies when you do an in-plan Roth conversion, or can you isolate the after-tax money in the Traditional 401(k) when converting to the Roth 401k? All the writing we've found only addresses the IRS ruling last fall re: moving after-tax money to a Roth IRA.
Question/Comment: Our company just added in-plan Roth 401k conversions to our plan, as well as allowing after-tax contributions to the Traditional 401k. Intra-Plan 401(k) Conversions To A Roth 401(k) ("Designated Roth Account") In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession. In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website, dedicated to advancing knowledge in financial planning. Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, a turnkey wealth management services provider supporting thousands of independent financial advisors.
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