Rechacterization of Salary Reduction to ROTH within a 401(k) Plan

[Guest Jules1]

Does anyone know the regulations about rechacterization of per-tax salary reduction to a ROTH within a 401(k) Plan. If it can be done what are the limits as to the amount permissible? Is there an annual limit?

[Lou S.]

If the plan allows in plan rollovers there is no limit on the types and amounts that can be converted within a 401(k) plan. Beyond the participant's ability to pay the tax hit that is.

http://www.irs.gov/Retirement-Plans/In-Plan-Roth-Rollovers-Expanded

Opens up some interesting planning opportunities for self employed with varying income that is sometimes negative in some years.

[Guest Jules1]

Thanks. This would appear to not limit the re-characterization to just the employee salary reduction account but also to any funds for which the employee is 100% vested. Am I reading too much into the language?

[imchipbrown]

Maybe someone with regs and such in front of them can flesh out this response. I'm restating a plan onto a new PPA prototype and it seems the Approval Letter was issued before a new regulation was passed that allows in-plan Roth conversions despite there not being a distributable event. My doc provider solves this with an "addendum" (like an amendment, I suppose) to allow in-plan Roth conversions at any time. There is also a checkbox (with or without the addendum) asking whether a participant needs to be 100% vested or not.

[QDROphile]

You might check to see if there is a requirement for an amount to be distributable before it can be "rolled over" internally. Such a requirement would be a limiting factor, especially with respect to amounts that are not elective deferrals.

[K2retire]

Maybe someone with regs and such in front of them can flesh out this response. I'm restating a plan onto a new PPA prototype and it seems the Approval Letter was issued before a new regulation was passed that allows in-plan Roth conversions despite there not being a distributable event. My doc provider solves this with an "addendum" (like an amendment, I suppose) to allow in-plan Roth conversions at any time. There is also a checkbox (with or without the addendum) asking whether a participant needs to be 100% vested or not.

As a practical matter, if you allow someone to convert non-vested dollars, they pay the tax, then terminate without receiving any additional vesting, they have now paid tax on balances that will be forfeited. Not a good idea.