Life and Death Planning for Retirement Benefits

Chapter 5: Roth Retirement Plans

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effect of transferring value into a DRAC from another account violates the requirements of § 402A . However, swapping assets between accounts at fair market value is permitted. Reg. § 1.402A-1 , A-13(a). A plan that holds a DRAC must keep track of each participant’s investment in the contract and also the Five-Year Period for such participant. Reg. § 1.402A-2 , A-1.

In-plan conversions

A new “in-plan conversion” option was added effective September 27, 2010, by the Small Business Jobs Act of 2010, for any 401(k), 403(b), or (after 2010) governmental 457(b) plan that offers both traditional and designated Roth elective deferral accounts: When an employee who has a traditional account in the plan becomes entitled to a distribution from that account, he can elect to have the distribution rolled directly into a DRAC in the same plan. In other words he can elect to “convert” the distribution to Roth status while keeping it in the employer’s plan. § 402A(c)(4) . Prior to this change in the law the only way an employee could convert an existing traditional nonIRA plan balance to Roth status was by rolling the distribution to a Roth IRA. See IRS Notice 2010-84, 2010-51 (11/29/10), for rules applicable to this new “in-plan conversion” option. 2010 in-plan conversions are subject to the same option to elect forward income-averaging (into 2011 and 2012) as other 2010 Roth conversions ( ¶ 5.4.05 ), except that the individual may make a different election for his 2010 in-plan conversions than he makes for all his 2010 Roth IRA conversions. Notice 2010-84, A-10. In-plan conversions are also subject to the same waiver and recapture provisions regarding the 10 percent early-distributions penalty as other Roth conversions ( ¶ 5.5.02 ). Notice 2010-84, A-8. The plan may is not required to offer in-plan conversions, even if it offers DRACs. Notice 2010-84, A-4. Since an in-plan conversion is technically a rollover of a plan distribution, a plan can allow the in-plan conversion only if the plan account holder is entitled to a distribution under the plan. However, the plan can allow distributions for purposes of in-plan conversions (1) under any circumstances where the plan could legally allow distributions from the employee’s account and (2) without being required to permit any other options for such distribution. Notice 2010-84, A-4. For example, the plan could permit in-service distributions solely for purposes of in-plan Roth conversions, without having to permit employees to take the money out of the plan. In-plan conversions are available to the surviving spouse as beneficiary but not to other Designated Beneficiaries. Notice 2010-84, A-14. The recharacterization option (¶ 5.6) does not apply to in-plan conversions, making the conversion decision in effect irrevocable. Notice 2010-84, A-6. Because of the added flexibility offered by the recharacterization option, a Roth IRA conversion would be preferable to an in-plan conversion if both choices are available to the distributee. It appears that the in-plan conversion will be of interest only to the participant who is entitled to funds out of his plan account, wants to do a Roth conversion, and has a strong preference for keeping the money inside a qualified plan for reasons such as creditor protection or investment options; or who wants to do a Roth conversion but is not permitted by the plan to roll the money to an outside Roth IRA. 5.8 Putting it All Together: Roth Planning Ideas and Principles This ¶ 5.8 looks at planning decisions and ideas connected with Roth retirement plans. It covers the decision of whether to go into a Roth plan in the first place ( ¶ 5.8.01 – ¶ 5.8.05 ); and the estate planner’s concerns in connection with Roth plans and conversions ( ¶ 5.8.06 ).