401k / 403b Internal Roth Conversion Rule Falls Short

I wrote about a new Roth Conversion provision in the small business tax bill that everyone has been waiting for, the ability to convert pre-tax dollars in an employer sponsor plan to the designated Roth portion of the employer sponsored plan. These plans are 401k’s, 403b’s and government 457b’s.

The blog entry  is more in depth here.

That was the good news, however lots of people are still not eligible to directly rollover their 401k, 403b or 457b money to a Roth IRA or designated Roth account while tax rates are low and time is on their side.

So why does this provision fall short?  You must have a distributable event to perform the conversion. This means you essentially must be 59 1/2 or have severed employment. This means anyone still working and under 59 1/2 are not eligible to convert to the designated Roth portion of the employer account. This makes the provision almost useless because at the distributable point you could already convert to a Roth IRA through a direct conversion; and the percentage of time that people want to keep their money in the employer plan over an IRA is rather low.

So with that being said, hopefully a lobbying or support organization pushes to take this one step further and allow everyone and anyone in an employer plan to convert to the Roth portion, just like in the IRA world.

One other interesting provision was the inclusion of government 457(b) plans as eligible plans for designated Roth accounts.

Dissapointing yes, but at least it is a start in the right direction to correct this issue.

I would think there would be some push to lift the limitations on Roth contributions as well since everyone is eligible to contribute to a non-deductible traditional IRA and then turn around and convert that, essentially mimicking a Roth conversion through a loop-hole.