The Internal Revenue Service has published guidance relating to rollovers from 401(k) plans to designated Roth accounts in the same plan.
Section 2112 of Small Business Jobs Act of 2010 added Section 402A(c)(4) to the Tax Code, effective for distributions made after Sept. 27, 2010, to permit plans that include a qualified Roth contribution program to allow individuals to roll over amounts from their accounts other than designated Roth accounts to their designated Roth accounts in the plan.
Notice 2010-84 will appear in Internal Revenue Bulletin 2010-51 dated Dec. 20, 2010.
According to the notice, a designated Roth contribution is an elective deferral that would otherwise be excludable from gross income, but that has been designated by the plan participant who elects the deferral as not being so excludable.
An employee’s designated Roth contributions and attributable earnings must be maintained by the plan in a separate account (a designated Roth account). A qualified distribution, as defined in Section 402A(d)(2), from an employee’s designated Roth account is excludable from gross income.
A distribution from an employee’s designated Roth account that is not a qualified distribution is includible in gross income pursuant to Section 72 in proportion to the employee’s investment in the contract (basis) and earnings on the contract.
Section 408A of the Tax Code sets forth the rules for Roth IRAs. A Roth IRA is a type of IRA under which contributions are not deductible from the owner’s gross income and qualified distributions, as defined in Section 408A(d)(2), are excludable from gross income. Section 408A(d)(4) prescribes a special ordering rule for distributions from a Roth IRA.
Section 408A(d)(3)(A) of the Tax Code provides that, generally, the taxable amount of a rollover or conversion to a Roth IRA is includible in gross income as if it were not rolled over or converted.
For taxable years beginning in 2010 only, however, the taxable amount of a rollover or a conversion to a Roth IRA that would otherwise be includible in gross income for the taxable year beginning in 2010 is includible half in the taxable year beginning in 2011 and half in the taxable year beginning in 2012, unless the taxpayer elects to include the entire taxable amount in the taxable year beginning in 2010.
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