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Roth Transfer...


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Securities laws and required disclosures aside - client is interested in offering election to transfer/invest participant 401(k) funds under the client's ESOP. Does anyone have any knowledge or experience whether the transfer of Roth funds is permitted?

Thanks in advance...

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Not sure I understand what your client is trying to do, but I would like to see some informed comments from others on this.

Does the client want to allow participants to transfer funds from their Roth accounts in the 401(k) into their ESOP accounts? Could maybe do a rollover if there's a distributable event, and the ESOP accepts the rollover. Looks like extra record keeping for the ESOP unless the ESOP already tracks after-tax contributions. And isn't the Roth feature lost, so you're back to (eventually) paying taxes on the earnings in the ESOP? I don't recall reading that you can have a Roth account in an ESOP, but someone will correct me if it's allowed or if I'm maybe looking at this all wrong.

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Given that the IRS has determined that the essence of an ESOP is simply investment of plan assets in employer securities, the first question is whether or not a Roth account can be invested in employer securities. I am aware of no proscription. Next question: Can elective deferrals be part of an ESOP? Absolutely. Next question (other than about the wisdom of the proposition)?

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I hadn't answered before because my answers are basically like the others. I can't think of a reason why not but can't seem to say I have seen guidance that clearly says "yes". The only think I will add is I have seen KSOPs with a Roth feature in them. Most KSOP are run like two different plans. That is to say the 401(k) portion of the plan is all invested in mutual funds and the ESOP portion in the ER stock. But I have seen KSOPs that the employer stock is one of the investment elections. It seems like that is more common with a daily valued 401(k) portion and a publicly traded ER stock. There can be practical issues with those kinds of KSOPs it seems like but it can be done.

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