In-Plan Roth Rollover and Withholding

[Rich L. Mayer]

With the new legislation regarding the availability of an In-Plan Roth Rollover without the requirement of a "distributable event", would the participant be able to have Federal Withholding distributed from the account also?

[MoJo]

I've seen nothing in the legislation that would create *any* right of distribution for the assets not currently "distributeable" but now available for Roth conversion. It appears to me that the answer to your question is "no" and that the participant would have to 1) have outside assets to pay the tax due; or 2) use assets that are subject to distribution to obtain the funds necessary for payment of the taxes due.

[rcline46]

First, there is NO distribution for an In Plan Roth Rollover. Although there are no regulations, I do not see how how there can be any tax withholding at the source. I think the participant will have to file estimated tax forms both for the Feds and possibly state goverment, and pay their taxes.

[Belgarath]

FWIW - since the in-plan Roth Rollover provisions prior to the new "fiscal cliff" legislation permitted a distribution of funds that were not otherwise distributable, SOLELY for the purposes of paying anticipated taxes, I'd be surprised if the IRS doesn't extend this treatment to the newly expanded in-plan Roth rollovers. I think the "withholding" language is perhaps a bit confusing, as it actually isn't withheld as far as I know - it is just reportable as taxable income. Sample Amendment section wording from Sungard (from 2011) is:

Additional distribution for withholding. If the Plan does not permit an actual distribution upon the event triggering the right to elect the In-Plan Roth Rollover, then a Participant may not elect to have an amount distributed for tax withholding purposes unless elected below:

9. [ ] Distribution for withholding also permitted. A Participant may elect to take a distribution solely for purposes of federal or State income tax withholding related to the In-Plan Roth Rollover.

[MoJo]

I respectfully disagree with Belgarath - to an extent. Prior law allowed for in-plan Roth conversions for plan assets that "could" be withdrawable under law (over age 59-1/2 for deferrals, profit sharing/match under those rules, etc.) and the in-plan conversion provisions could be implemented EVEN IF the plan didn't actually allow those types of in-service distributions. The IRS would allow a plan to have the conversion option in place, and include an option to actually allow some of the otherwise legally distributable assets to be distributed to pay the taxes due, if the plan wanted it to, without having a full right to distribution from those sources (i.e. the distribution right per the plan would only apply to distributions to pay taxes due as a result of the conversion). The *new* law allows for conversions of balances for which no right of distribution exists under *law.* Different animal entirely.

I think it would be a BIG stretch if the IRS "created" a distribution right (even for the payment of taxes) where one is specifically prohibited by law.

Just my two cents worth.