March 10, 2010 – The U.S. Senate has accepted an amendment to an expiring tax provision extenders bill, which would allow pretax balances in 401(k)-type plans to be converted to designated Roth account status. Roth-type contributions provide no tax-deferral at the time of contribution, but may generate tax-free earnings. Roth IRAs have been available since 1998, and designated Roth accounts within IRC Sec. 401(k) and 403(b) plans have been permitted since 2006.
Under current law, pretax deferrals in 401(k), 403(b), and governmental 457(b) plans may be converted to Roth status only by rollover to a Roth IRA, either directly, or converted after rollover to a Traditional IRA.
Some in the retirement plan industry have identified this as a cause for assets leaving employer plans earlier than they otherwise might, as plan participants with pretax assets seek the option of tax-free earnings that is available in a Roth IRA. It has also been argued that this desire has generated pressure on plan administrators to liberalize plan provisions to allow earlier distributions to participants who are still employed.
If this Senate tax extenders bill passes in its current form, the Senate and House would then have to reconcile differences in their bills before this legislation could be signed into law.