IRS issues guidance on rollovers from 401(k) and other employer plans to Roth IRAs

As of January 1, 2008, employees participating in a 401(k) or other qualified plan, 403(b) plan, or governmental 457(b) plan can roll over eligible non-Roth distributions into a Roth IRA, thanks to the Pension Protection Act of 2006 (PPA). Prior to the Act, this could only be accomplished in two steps--by first rolling the distribution over into a traditional IRA, and then converting the traditional IRA to a Roth IRA.

In Notice 2008-30, the IRS has issued guidance on these rollovers. The following are the key provisions of the Notice:

• Rollovers can be either direct rollovers or 60-day rollovers.
• Participants must include in income any amount that would have been taxable if the distribution were not rolled over.
• For taxable years beginning before January 1, 2010, a rollover is not allowed if the taxpayer has modified adjusted gross income (either individually or with a spouse) exceeding $100,000, or is married filing separately. The plan administrator is not responsible for determining whether or not a participant is eligible to make the rollover to a Roth IRA.
• The 10% early distribution tax will not apply to the rollover, However, as with conversions of traditional IRAs to Roth IRAs, if the participant takes a premature distribution from the Roth IRA within five years of the rollover, the 10% penalty will generally apply to the distribution (to the extent the distribution consists of funds that were taxed at the time of the rollover). The usual exceptions to the 10% penalty apply.
• Plans must allow participants to elect a direct rollover to a Roth IRA.
• If a participant elects to make a direct rollover to a Roth IRA, mandatory 20% withholding will not be required even though all or part of the distribution may be included in the participant's gross income. (However, the participant and plan can agree on voluntary withholding.)
• Plan beneficiaries can directly roll over distributions to a Roth IRA, but only if the plan allows. The beneficiary's modified adjusted gross income and filing status determine whether the beneficiary is eligible to make the rollover.

Note: Rollovers from Roth 401(k) and Roth 403(b) accounts to Roth IRAs were permitted prior to the PPA, and are subject to different rules.

Notice 2008-30 also provides guidance on several other provisions of the PPA, including qualified optional survivor annuities, and the calculation of pension plan present values using the PPA's new definitions of "applicable interest rate" and "applicable mortality table."

For a copy of Notice 2008-30, click here.