The American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, permanently expands the in-plan Roth conversion provisions to permit any vested pre-tax account in a 401(k), 403(b), or governmental 457(b) plan to be converted into an after-tax Roth account within the plan.  For example, a plan participant could choose to convert pre-tax 401(k)/403(b)/457(b) contributions, matching contributions, profit sharing contributions, or rollover accounts into after-tax Roth accounts in the plan.  There are no age or income requirements. 

Why would anyone want to convert from pre-tax to after-tax?  The advantage is that the after-tax Roth account (including earnings) will not be subject to future income taxes; however, the disadvantage is that current income taxes are due on the converted amount.  So, the question is whether one's income tax rates today are lower than what they may be in future years when amounts are withdrawn from the plan or a Roth IRA.  Of course, an individual's future tax rates are unknowable.  Even if someone has a strong feeling that all tax brackets will be higher in the future, the pertinent question is whether an individual's specific rate, based on future taxable income, will be higher at an unknown time in the future. 

The new in-plan Roth conversion option might be most attractive to younger employees who are currently in the lowest tax brackets and to others who simply wish to "hedge their bets" on future tax rates by diversifying the taxability of their retirement portfolio (i.e. by designating some funds to be taxable and some to be non-taxable in the future).  In any case, the employee would need to have sufficient funds outside the plan to pay current income taxes on the converted amount.  While this new option may be very desirable for some employees, it certainly introduces complexity - with respect to employee communications, as well as the plan's internal recordkeeping and compliance requirements.  It is the employer's decision whether or not to offer this new option to its employees in the plan. 

This new option is available now for plans which have been (or will be) amended to add this new conversion provision and to allow ongoing after-tax Roth contributions.  However, we recommend waiting for anticipated IRS guidance before an employer makes the decision to add this option.  We will keep you informed when the IRS provides further guidance or clarification.  If you have any questions or need additional information, please let us know.