In-Plan Roth Conversion | Ed Slott and Company, LLC

In-Plan Roth Conversion

Have a client that was recently notified his company was going to allow in-plan Roth Conversions. He is maxing out his deferral into a pre-tax account and receiving an employer match. Probably wouldn't make tax sense for him at this point to convert existing pre-tax dollars, but want to consider non-deductible contributions.
Less his contributions and match, there is approximately 30,000 a year he could contribute in non-deductible contributions. If he were to efficiently convert those non-deductible dollars to the Roth account, he would be able to take advantage of tax-free distributions on both the contribution and growth.
My question is, as with IRAs and non-deductible IRAs, there are basis issues in regards to the pro-rata amount that can be converted of the pre-tax vs. non-deductible. Are there considerations similar to that in the 401k? If we do 30k in non-deductible contributions, can you elect to only convert the non-deductible contributions and avoid creating any additional taxable income on the conversion?

Thanks!!

  • No. However, the after tax sub account is typically treated as a separate account. Therefore, when an IRR is done from the after tax account, any earnings in the after tax account will be pro rated. Usually, the participant will do an IRR at least one and possibly several times a year right after making contributions, so earnings buildup in the sub account will be small. 
  • Some features of the plan relative to the above that client needs to determine are how often an IRR can be done, if a direct rollover to a Roth IRA is also an option, whether IRRs from the after tax account remain distributable from the designated Roth while still in service. Note that a plan must usually maintain two levels of accounting in the Designated Roth, one for distributable amounts (those coming from the after tax account that continue to be distributable) and the other for non distributable amounts such as elective deferrals and company matching contributions that could be done as a taxable IRR.

Thanks for the response and clarification. 

 

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