Should Your Plan Offer in-Plan Roth Rollovers?

by | May 10, 2016 | Institutional Services

In conjunction with offering a Roth deferral option, plan sponsors may want to consider an in-plan Roth rollover (IRR) feature. This feature allows participants to roll over tax-deferred amounts — including pretax salary deferrals and matching and nonelective employer contributions — from their traditional 401(k) accounts into designated Roth 401(k) accounts within the plan, as well as after-tax amounts.

Which Participants Might Benefit From a Roth 401(k)?

From the participant’s perspective, the relative tax advantages of Roth versus pretax contributions will depend on individual circumstances, including age, length of time before anticipated distribution, and marginal tax rates at the time of contribution and anticipated distribution. For example, an older participant who expects to be in a lower tax bracket when plan funds are withdrawn in retirement may have little to gain from making designated Roth contributions, whereas a participant who plans on passing on the Roth assets to his or her grandchildren may have much to gain by the potential for long-term, tax-free compounding.

Which Plan Sources Qualify For an IRR?

It depends on the plan design you select. The plan could be designed to require that IRRs are only available when a participant has a distributable event that is an eligible rollover distribution within the meaning of Internal Revenue Code Section 402(c)(4). Generally, any amounts eligible for rollover, including both vested matching and nonelective contributions, may be part of an IRR. The plan could also be designed to permit an IRR

Administrative Considerations

Before implementing an IRR feature, consider that it will impose some additional administrative burdens on the plan.

Plan Amendment. Before a 401(k) plan sponsor can amend the plan to provide an IRR feature, the plan must contain provisions permitting designated Roth contributions as well as pretax deferrals. A plan that does not otherwise have a designated Roth program is not permitted to establish designated Roth accounts solely to accept rollover contributions from non-designated Roth accounts. An IRR may be made only if, at the time of the rollover contribution to the designated Roth account, the plan has a qualified Roth contribution program in place.

Taxation of the Rollover. The IRR is treated as a taxable distribution. The taxable amount is generally equal to the fair market value of the distribution minus any basis the participant has in the distribution. Although the 20% mandatory withholding on eligible rollover distributions does not apply to an IRR, the participant should be prepared to pay the income taxes associated with the rollover.

No Recharacterization. If the participant makes use of the IRR feature to convert pretax contributions to Roth contributions, such action is irreversible. In contrast, a taxpayer who completes a Roth conversion in a Roth IRA has until the tax-filing deadline, plus extensions, to reverse, or “recharacterize,” the transaction.

Recapture Tax. The 10% early distribution penalty does not apply to an IRR, even if the participant is under age 59½. However, if an amount allocable to a taxable IRR is withdrawn prior to the end of the fifth year after the year of the conversion — and no exception to the penalty applies, such as being over age 59½ — then the participant would owe the 10% penalty on the taxable amount of the IRR that has been withdrawn.

Notices. In the event an IRR feature is added, participants will need to receive timely notification of its availability. A plan that offers IRRs must include a description of this feature in the Section 402(f) written explanation to individuals receiving eligible rollover distributions.

Recordkeeping. Plan sponsors must have adequate recordkeeping procedures in place to administer the designated Roth accounts and to satisfy applicable Form 1099-R reporting requirements.

Latest From The Blog


Our Services

Investment Management

Tailor portfolios to your needs and goals.

Retirement Planning

Investing and saving wisely is vital to success in retirement.

Financial Planning

Navigating the complexities of your financial affairs can be simplified.

Tax Management

Help to increase the amount you “take home”.

Estate Planning

Protect your loved ones and make sure your legacy endures.

Executive Compensation Analysis

Simplify the many options and decision points of executive compensation plans.

Education Planning

Confidently plan for your children’s future.

Charitable Giving

Give in a tax-smart, simple way.

*Please Note: Limitations.  The scope of services to be provided depends upon the terms of the engagement, and the specific requests and needs of the client. BFSG does not serve as an attorney, accountant, or insurance agent.  BFSG does not prepare legal documents or tax returns, nor does it sell insurance products.  Please Also Note: Different types of investments involve varying degrees of risk.  Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by BFSG) or any financial planning or consulting services, will be profitable, equal any historical performance level(s), or prove successful.

Sign Up For Our Newsletters

(They're great, we promise)

Connect With Us

Financial Services Group BBB Business Review