In-plan Roth conversion offers more choice

With the anticipation that taxes will likely rise in the years ahead, Roth accounts are increasing in popularity since taxes are paid today vs. at the time of withdrawal. If you already offer Roth 401(k) contributions, you can provide employees with more choice by enabling in‑plan Roth conversion.

In-plan Roth 401(k) conversion highlights:

  • Participants can convert pre‑tax assets to Roth 401(k) assets.
  • Participants pay income tax on the converted assets at time of conversion.
  • Employers don’t withhold the tax, and it won’t be withheld at conversion.

Consider the following points:

  • In‑plan Roth conversion occurs when a participant changes some or all of their eligible pre-tax assets in their retirement plan account to Roth assets. While converted amounts are not distributed, they are taxable in the year of conversion.
  • Once converted, the converted amounts and earnings are generally not taxed at distribution; however, the converted amounts remain subject to a 10% additional federal tax for five years, beginning in the year of conversion, unless an exception applies.
  • Any earnings on Roth 401(k) contributions can generally be withdrawn tax-free if the participant meets the two requirements for a “qualified distribution”: 1. At least five years must have elapsed from the first day of the year of the initial Roth contribution (including a conversion); 2. The participant must have reached age 59½ or become disabled or deceased.
  • If a participant takes a nonqualified withdrawal of their Roth 401(k) contributions, any Roth 401(k) investment returns are subject to regular income taxes, plus a possible 10% additional federal tax if withdrawn before age 59½ unless an exception applies.

Key takeaway

Talk with your Bank of America representative about options for your plan and workforce.