Rule Changes on Converting T-IRA's to Roth? What?

[Telly]

I just saw this in a "summary" of the tentative agreement on avoiding the fiscal cliff.

First I've heard of this issue. I used italics on the relevant text:

Across-the-board cuts

Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rules changes on converting traditional individual retirement accounts into Roth IRAs

This is the quote source: Details of the deal to avert the 'fiscal cliff'

Can anyone shed any light on this?

 

[Mike1968]

The article on Bloomberg mentions 401k specifically not tIRA's like your article.

Half of the $24 billion cost of delaying the cuts would be covered by allowing 401(k) retirement account holders to convert some of their balances into Roth-style individual retirement accounts that can be tapped tax-free in retirement, said a Senate aide familiar with the talks.

The change would raise revenue because people who do such conversions pay income taxes up front. The conversions aren’t currently allowed in 401(k) plans, the aide said.

White House Reaches Budget Agreement With Republicans - Bloomberg

 

[bUU]

If that extends the pro rata rule to include the pre-tax portion of 401(k)s, instead of establishing a separate rule, it basically kills the idea of a Backdoor Roth for anyone with substantial pre-tax 401(k) balances.

 

[KingB]

The article on Bloomberg mentions 401k specifically not tIRA's like your article.

White House Reaches Budget Agreement With Republicans - Bloomberg

Half of the $24 billion cost of delaying the cuts would be covered by allowing 401(k) retirement account holders to convert some of their balances into Roth-style individual retirement accounts that can be tapped tax-free in retirement, said a Senate aide familiar with the talks.
The change would raise revenue because people who do such conversions pay income taxes up front. The conversions aren’t currently allowed in 401(k) plans, the aide said

I don't understand this. I just did an in-plan Roth conversion late last year (2012) on a 401K plan. Unless they plan to withold taxes when you do the conversion. In my case, no tax was witheld.

 

[bUU]

A 401(k) in-plan Roth conversion (also called an "in-plan Roth rollover") allows you to transfer the non-Roth portion of your 401(k) account into a designated Roth account within the same plan. The amount you convert is subject to federal income tax in the year of the conversion (except for any nontaxable basis you have in the amount transferred), but qualified distributions from the Roth account in the future are entirely income tax free.

401(k) In-Plan Roth Conversions - 360 Degrees of Financial Literacy

So even if they didn't withhold tax, you're still responsible for paying tax on the amount converted.

Wouldn't it be unusual to withhold taxes in such an in-plan conversion, since any such withholding would constitute effectively taking money out of a 401(k) without penalty?

 

[KingB]

401(k) In-Plan Roth Conversions - 360 Degrees of Financial Literacy

So even if they didn't withhold tax, you're still responsible for paying tax on the amount converted.

Wouldn't it be unusual to withhold taxes in such an in-plan conversion, since any such withholding would constitute effectively taking money out of a 401(k) without penalty?

I realize that I have to pay the tax on the conversion. The forms stated that several times.

Unless they change the way the taxes are paid and when, this "new" rule is not really new.

 

[bUU]

Here's the actual text related to my concern:

155
16 SEC. 1002. AMOUNTS IN APPLICABLE RETIREMENT PLANS
17 MAY BE TRANSFERRED TO DESIGNATED
18 ROTH ACCOUNTS WITHOUT DISTRIBUTION.
19 (a) IN GENERAL.—Section 402A(c)(4) is amended by
20 adding at the end the following:
21 ‘‘(E) SPECIAL RULE FOR CERTAIN TRANS-
22 FERS.—In the case of an applicable retirement
23 plan which includes a qualified Roth contribu-
24 tion program—
156
1 ‘‘(i) the plan may allow an individual
2 to elect to have the plan transfer any
3 amount not otherwise distributable under
4 the plan to a designated Roth account
5 maintained for the benefit of the indi-
6 vidual,
7 ‘‘(ii) such transfer shall be treated as
8 a distribution to which this paragraph ap-
9 plies which was contributed in a qualified
10 rollover contribution (within the meaning
11 of section 408A(e)) to such account, and
12 ‘‘(iii) the plan shall not be treated as
13 violating the provisions of section
14 401(k)(2)(B)(i), 403(b)(7)(A)(i),
15 403(b)(11), or 457(d)(1)(A), or of section
16 8433 of title 5, United States Code, solely
17 by reason of such transfer.’’.

I suppose we'll have to check each of the references to know if any of them are references to the pro rata rule.

 

[Texas Proud]

So what it sounds like is....

Lets get that tax money from those IRAs right now and count that as income, but we do not care that we cost the country in the long run since all future earnings will be tax free....






At least until some Congress in the future decides to tax them.....

 

[bUU]

So what it sounds like is....

Lets get that tax money from those IRAs right now and count that as income, but we do not care that we cost the country in the long run since all future earnings will be tax free....

This is nothing new. The same thing applied to the 2005 law that made Roth conversions possible in the first place. This is just expanding the scope of what can be converted.

 

[Htown Harry]

So what it sounds like is....

Lets get that tax money from those IRAs right now and count that as income, but we do not care that we cost the country in the long run since all future earnings will be tax free....

Exactly right. About $12 billion in income according to this Bloomberg story.
Senate

Spending Cuts

The automatic spending cuts, which were the biggest stumbling block yesterday, would be delayed for two months from their scheduled start date of tomorrow.

Half of the $24 billion cost of delaying the cuts would be covered by allowing 401(k) retirement account holders to convert some of their balances into Roth-style accounts that can be tapped tax-free in retirement, said a Senate aide familiar with the talks.

The change would raise revenue because people who do such conversions pay income taxes up front. The conversions aren’t currently allowed in 401(k) plans, the aide said.

The other half of the spending cuts would be prevented through replacement spending cuts, half in defense and half in non-defense programs...

 

[thefinancebuff]

I just saw this in a "summary" of the tentative agreement on avoiding the fiscal cliff.

First I've heard of this issue. I used italics on the relevant text:



This is the quote source: Details of the deal to avert the 'fiscal cliff'

Can anyone shed any light on this?

Bad reporting. It has nothing to do with converting IRAs. Only converting traditional 401k to Roth 401k. It makes more people eligible for such in-plan conversion. More people doing it means more revenue now and less revenue down the road (but who cares).

 

[jebmke]

Bad reporting. It has nothing to do with converting IRAs. Only converting traditional 401k to Roth 401k. It makes more people eligible for such in-plan conversion. More people doing it means more revenue now and less revenue down the road (but who cares).

Yes, reading the text of the bill, I could only find reference to 401(k) -- no references to IRAs.

 

[pb4uski]

So it sounds like they are just expanding the concept of Roth conversions from IRAs to 401ks in the hope of accelerating tax receipts.

 

[jebmke]

So it sounds like they are just expanding the concept of Roth conversions from IRAs to 401ks in the hope of accelerating tax receipts.

looks like everything is dead in the House anyway.

 

[KingB]

So it sounds like they are just expanding the concept of Roth conversions from IRAs to 401ks in the hope of accelerating tax receipts.

In-plan Roth conversion is more convenient that people may use it more. Before I found out about this plan, I was thinking of rolling over the amount I needed to convert into an IRA and then convert that amount into Roth. Foutunately, the 401k plan has good choices of institutional funds that have low ER.

 

[Telly]

Yes, thank you, bad reporting indeed. MSN seems to employ some of the less-capable people in media. Are their many truely capable people left in media? Is journalism dead? Ah, that would be a different thread.

I rolled my 401k into an IRA years ago, and frankly I have tuned out on 401k and Roth 401k. So I guess I speak IRA (T-IRA) and Roth.

Thanks again for the correction.