In-Plan Conversions to Roth Accounts

The American Taxpayer Relief Act of 2012 includes a provision that allows defined contribution retirement accounts not otherwise distributable to be converted within the plan to Roth accounts.  Previously, only amounts that were deemed distributable (such as when the participant attained age 59½) could be converted to in-plan Roth accounts.

Although the provision was effective January 1, 2013, it may be applied to account balances in existence prior to that date.

Because these conversions are taxable, Congress expects that this provision will generate $12.2 billion in tax revenue over the next ten years.

On February 26, 2013, the American Society of Pension Professionals and Actuaries (ASPPA) sent a letter to the Internal Revenue Service (IRS) requesting further guidance on the provisions of the American Taxpayer Relief Act that expand the scope of in-plan Roth conversions.  ASPPA specifically asked for clarification of the beginning date of the 5-year period of participation required for a tax-free distribution from a Roth account that was created by an internal conversion.

Coverdell Accounts Retained

Prior to the American Taxpayer Relief Act (ATRA) of 2012, it was feared by many (and hoped by some) that Coverdell Education Savings Accounts would be gutted to the point that they would disappear from use.

However, the ATRA of 2012 has made permanent all of the benefits that EGTRRA (Economic Growth and Tax Relief Reconciliation Act of 2001) expanded for Coverdells, including:

• Tax-free use of Coverdells for K–12 expenses;

• $2,000 annual contribution limit (was $500 before EGTRRA);

• Ability to contribute to both a Coverdell and a 529 plan for the same beneficiary in the same tax year.