Small Business Jobs Act of 2010: Roth Conversions

On September 27, 2010, the Small Business Jobs Act of 2010 (SBJA 2010) was signed into law. The new law significantly expands the potential use of the Roth tax treatment within employer retirement plans.

Small Business Jobs Act Gives Many the Option to Rollover to Roth

Beginning in 2010, new rules allowed employees who were eligible to receive a distribution to rollover amounts from their retirement plans (401k, 403b, or governmental 457b) to a Roth IRA. These new rules also allowed employees who did so to defer the tax due on such rollovers into 2011 and 2012. But the new rules didn’t allow participants to convert pre-tax dollars to Roth dollars within their existing retirement plans.

Small Business Jobs Act

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Moreover, the new rules allowed rollovers to Roth IRAs, but unlike most retirement plans the Roth IRA has income eligibility requirements which many employees may not have met, thus denying them the ability to convert their retirement savings from pre-tax to Roth. SBJA 2010 addresses these issues, as well as expands the type of plans that can provide a Roth account to employees.

SBJA 2010 Requirements for Converting to Roth

The new law permits plan participants to leave their money in their retirement plan, but convert it from pre-tax to Roth if certain circumstances are met.

First, the retirement plan document has to allow for Roth contributions. The participant must have experienced a distributable event under the terms of the plan, thus conversion is not necessarily available to every plan participant. To allow more access for pre-tax-to-Roth conversions plan documents should be amended to allow for in-service withdrawals (if they do not allow for such at present).

Also, a participant’s ability to defer taxation provided for rollovers to Roth IRAs has been extended to in-plan conversions that occur within 2010. In other words, if a plan allows, and a participant converts pre-tax dollars to Roth dollars in 2010, they are allowed to defer taxation into 2011 and 2012. Thus, if an employer wishes to provide this flexibility to their participants it makes sense for them to take action (amend plan documents, discuss with recordkeeper/administrator/TPA, communicate to participants, etc.) sooner rather than later.

In addition, the SBJA 2010 authorizes state or local government 457b plans to include Roth accounts, effective for plan years beginning after December 31, 2010.

For More Information on the Small Business Jobs Act of 2010

If you have any questions regarding the Small Business Jobs Act of 2010, or wish to discuss making changes to your 401k plan, please contact us, your 401k Advisor.

About Peter Philipp, CFA, CFP®

Peter Philipp specializes in employee benefits and investment management for businesses and individuals. In 1993, he helped launch the world’s first target-date funds, a concept which has become the cornerstone of today’s 401(k) plans. Peter holds both the Chartered Financial Analyst designation and the CERTIFIED FINANCIAL PLANNER™ certification, an elite distinction since less than half of 1% of all financial advisors are “dually‐certified.”


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