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In-Plan Roth Conversion


Molgilny89

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A 401(k) plan allows participants to convert their after-tax contributions to Roth via an in-plan Roth conversion feature. After a conversion, are those dollars completely recharacterized as Roth such that they would no longer be eligible for a penalty-free early withdrawal? For example, if a 50 year old participant had $7,000 in after-tax contributions, he would be able to withdraw them at any time without an early withdrawal penalty. If he converts them to Roth via the in-plan conversion, would he lose that ability to withdraw the funds before age 59.5? 

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I'm not sure I understand. The conversion will be to a sources that mirror's the characteristics of the original source. So if he could take in-service withdrawals of after tax contribution source, he can take in service withdrawals of roth converted after tax contribution source. That is you might need a separate ROTH source for each type of money that a participant may convert to roth.

As for the taxation I think if he takes a later distribution from the roth source before age 59.5 you'll have some recovery of roth basis and some taxable piece based on the protated potion that is earnings. Unlike an IRA where you recover the ROTH basis on a FIFO basis, I think in qualified retirement plans you still have the protata method you need to use. Unless there was a change I missed.

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Agree with Lou. Definitely would have to take pro rata basis and earnings on any withdrawal. Any taxable portion would also be subject to 10% penalty, I think, if not a qualified distribution.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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49 minutes ago, Lou S. said:

I'm not sure I understand. The conversion will be to a sources that mirror's the characteristics of the original source. So if he could take in-service withdrawals of after tax contribution source, he can take in service withdrawals of roth converted after tax contribution source. That is you might need a separate ROTH source for each type of money that a participant may convert to roth.

As for the taxation I think if he takes a later distribution from the roth source before age 59.5 you'll have some recovery of roth basis and some taxable piece based on the protated potion that is earnings. Unlike an IRA where you recover the ROTH basis on a FIFO basis, I think in qualified retirement plans you still have the protata method you need to use. Unless there was a change I missed.

The plan document allows for in-service withdrawals of after-tax contributions at any age. The plan document only allows in-service withdrawals of Roth contributions after age 59.5. If a participant converts after-tax dollars to Roth dollars, is it your opinion that those monies should still be characterized as after-tax for purposes of determining whether they are eligible for an in-service withdrawal?

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35 minutes ago, Molgilny89 said:

The plan document allows for in-service withdrawals of after-tax contributions at any age. The plan document only allows in-service withdrawals of Roth contributions after age 59.5. If a participant converts after-tax dollars to Roth dollars, is it your opinion that those monies should still be characterized as after-tax for purposes of determining whether they are eligible for an in-service withdrawal?

A roth conversion source of an after tax account account that is converted is not the same as a roth 401(k) contribution account and the two should be account for separately.

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